Mumbai: Global financial services and investment firm CLSA said that the biggest risk to the Indian bond market and currency is the expiry of Dr Raghuram Rajan’s term as the governor of Reserve Bank of India (RBI) in September this year.
Dr Raghuram Rajan had successfully halted the crash of rupee after he became the RBI governor and is considered to be the favourite of global investors. In his weekly report titled Greed & Fear, which is widely read by invest-ors worldwide, Christo-pher Wood of CLSA said the rupee should remain relatively stable in an emerging market context given that RBI under Dr Rajan is consciously targeting real interest rates in stark contrast to the negative rates being targeted by G7 central bankers.
“This is also why Greed & Fear continues to like the Indian fixed income story, which for now continues to remain more straightforward than the Indian equity story. This is also why foreigners will snap up all the bonds they can buy when the government allows them to buy more on the market,” Mr Wood said.
Foreign investors currently own $52 billion worth of Indian debt securities.
However, he added that the biggest risk to both the bond market and the currency is if Dr Rajan’s term in office is not renewed.
“This is a possibility given that the RBI governor was appointed by the previous Congress-led government,” he said. But Mr Wood also believes that Dr Rajan, who is trusted by market participants, enjoys the support of Prime Mini-ster Narendra Modi.
“He (Mr Modi) must also recognise the constructive role played by RBI under Dr Rajan in both imposing a tighter non-performing loan (NPL) reporting system on banks, carrying out a stress test on banks, and putting pressures on them to go after defaulting creditors,” Mr Wood wrote in CLSA’s newsletter.
In his view, the RBI governor’s policy is refreshing in the context of the monetary quackery going on in the G7 world, which has been criticised by Dr Rajan.
“This is why he will be a natural candidate to lead the IMF, or some other such institution, once those unconventional mo-netary policies have been fully discredited. But that is a story which has not fully yet played out, which is also why he should remain RBI governor in the interim,” he noted. While finance minister Arun Jaitley did not comment on Dr Rajan’s extension, there is a speculation that Dr Rajan may be elevated as the finance minister.
