Sandeep Kothari,
Portfolio Advisor, Fidelity India Fund
Indian equities and the rupee saw increased volatility last Tuesday due to the unexpected resignation of Reserve Bank of India (RBI) governor Urjit Patel, and state-level election results going against Prime Minister Narendra Modi’s political party ahead of national elections in May 2019. However, after the initial nervousness, markets regained their composure. The MSCI India index ended the day up by 0.3%. The rupee closed 0.08% lower vs. the US dollar.
RBI governor’s resignation and appointment of Shaktikanta Das
The resignation of the RBI governor Urjit Patel on Monday, nine months prior to the end of his tenure, came as a surprise despite the ongoing differences between the RBI and the government. Note that this is only the second time in history that an RBI governor has stepped down before the end of the term. The market opened lower on Tuesday given the implication of Urjit Patel’s exit for the currency, interest rates and markets in general over the medium to long term.
However the government moved swiftly to appoint Shaktikanta Das as the new RBI governor. Shaktikanta Das is a former economic affairs secretary and a member of the Finance Commission. As economic affairs secretary from 2015 to 2017, Das has worked closely with the central bank. At present, he is the government’s representative at the Group of 20 summits. With his appointment, I think there will not be any major implication for the markets. There is only a limited scope for tinkering with the interest rates, given that the inflation targeting framework is a mandate for the RBI. The RBI is also likely to continue with its policy towards bad loan recognition and the bankruptcy process. However, a more flexible approach in dealing with the liquidity situation and loans to the small and medium enterprises (SME) sector could be one of the potential change.
BJP’s loss in three state-level elections
The Modi-led Bharatiya Janata Party (BJP), lost three key state elections to the Indian National Congress, which was in power at the centre till 2014. Although Modi’s party faced anti-incumbency in all these states, these election results indicate the revival of the Congress party and the increased potential for a coalition of anti-BJP parties led by the Congress. This also means an increase the uncertainty for the markets ahead of the national elections in May 2019.
At the corporate front, this uncertainty may lead to a further push-back in private sector capex cycle. However, if we look beyond this near term uncertainty, the situation looks promising because:
- The clean-up of banks and private sector balance sheets has been completed over the last 5-6 years
- Capacity utilization have been slowly inching up
I think the investment cycle should revive if either a BJP government or a Congress-led government comes to power in 2019. These are more likely scenarios in my opinion. My worst-case scenario is if a coalition of smaller parties (a third front) forms the next government without a clear vision for the future. However, this is a low probability event in my opinion.
Outlook
The earnings cycle in India has been weak in last the few years and a recovery in earnings has not yet materialised. Meanwhile, valuations have corrected to more reasonable levels. I believe the markets will be volatile in the near term, but India’s longer-term structural growth opportunity remains intact. Also, there will not be any major shift in domestic policy direction if either a BJP or a Congress-led government comes to power in 2019, which in my opinion is a more likely scenario.
