INR outlook faces downside risks amidst RBI governor’s resignation

Reserve Bank of India governor Urjit Patel stepped down from his post in a surprise move yesterday. Patel cited “personal reasons” for his move; however, this is a sign of an increasing dispute between Patel and the government given the government’s attempts to interfere with the central bank’s decisions, noted Nordea Bank in a research report. The Indian rupee fell 0.7 percent against the USD yesterday after the announcement.

“We remain bearish due to elevated global uncertainty as well as domestic risks such as the brewing banking crisis”, said Nordea Bank.

Deputy governor Vishwanathan is likely to be appointed as the interim head. Immediately after the announcement of Patel’s resignation, the non-deliverable INR forwards dropped 2 percent.

Patel, in over two years as the RBI governor, has attempted to restore the RBI’s credibility as combating inflation independently. Recently, Patel and the finance ministry were at loggerheads as Patel tried to clean up bad debt among public banks, whereas finance ministry wanted the central bank to ease lending restrictions, so banks could lend more freely and underpin the economy ahead of a general election next spring.

The government has also pushed to extract additional cash from the RBI’s excess capital, estimated to be INR 3.6 trillion, to fund the weak state-owned banks. The central bank has been fighting back the pressure because of the fear of destabilizing the financial markets and building moral hazard for the banks.

The INR outlook faces additional layer of risk due to the surprising resignation of Patel. The Indian rupee has been the worst performing major Asian currency in 2018. The rupee’s recovery in the months of October and November has been wiped out half by now as confidence has turned downwardly in December.

“In the near term, concerns about whether the RBI will get a credible successor adds to the downside risks of the INR. We maintain our 3M forecast for the USD/INR at 76”, added Nordea Bank.