Fund managers focus on RBI developments after Assembly election fever

The markets seem to have digested the surprise resignation of Reserve Bank of India (RBI) Governor Urjit Patel and the setback the Bharatiya Janata Party (BJP) suffered in the state polls by closing with gains on Tuesday.

However, money managers are maintaining a cautious stance. While election-related uncertainty is out of the window for now, they are closely eyeing the developments on Mint Street.

Some fund managers are concerned whether the good work done by the central bank on inflation and clean-up of banks may get undone due to change in the leadership.

“The resignation has put a question mark on the independence of the RBI, which is now a much bigger concern than the election outcome. While friction between governments and central banks are not uncommon, the Centre went too far in this case,” a fund manager said, requesting anonymity. A near two per cent recovery from the day’s low for the benchmark indices doesn’t mean the markets are out of the woods, said money managers, adding that they will closely watch if the change of guard in the RBI leads to any structurally adverse changes in the economy.

“We will have to wait and watch to see if there are any structural implications. In the last few years, the RBI has brought in several changes. We will have to see if there is any change in stance,” said Anand Shah, director and chief investment officer of BNP Paribas MF.

“However, one must remember that the RBI is an institution and so change of an individual may not have such a large impact,” he added.

Experts say a weak RBI could be negative for both the equity as well as the debt markets as it will have a direct bearing on the economy. “The simple common perception today is that there is an attempt to compromise RBI’s independence in a variety of ways. The most important thing from the bond market perspective is the notion that the government wants large portions of RBI’s capital to step up its fiscal spend. If the government is successful in controlling these notions and perceptions, then the current widening of risk premium may well prove temporary,” said Suyash Choudhary, head, fixed income at IDFC MF.

The rift between the RBI and the government took a more serious turn when reports of the government considering invoking Section 7 of the RBI Act surfaced in October. The section empowers the government to issue directions to the RBI on matters of public interest.

However, experts said it is difficult to gauge which way markets will move.

“Markets have surprised us positively by closing on the higher side. We will have to see who comes in place of Patel and how the political scenario shapes up. That will give clarity,” said Sunil Singhania, founder of Abbakus Asset Manager.

Money managers seem relatively less concerned about election-related volatility.

“Elections are more transitional in nature. So, once these events are behind us, market focus will shift back to businesses and their long-term potential,” Shah added.