DebtFX: Currency and Bond Market To Stay Defensive

While global markets gear up ahead of the United Kingdom's European Union referendum decision, the Reserve Bank of India's (RBI) governor Dr Raghuram Rajan's decision to not continue for a second term will send jitters in domestic markets, says India Ratings and Research (Ind-Ra). The rupee is likely to stay on the backfoot, on account of renewed volatility and is likely to trade in the range of 67.10/USD-67.85/USD this week (67.09/USD at close on 17 June 2016). The bond market too is unlikely to cheer the governor's announcement and may trade in the range of 7.50%-7.58% this week (7.50% at close on 17 June 2016).

Rethinking of the Rate Outlook: The week started with the exit announcement of the RBI governor Dr Rajan. On the other hand, the United Kingdom's future with the European Union will be decided by the end of this week. The agency believes the forming of the monetary policy committee in coming months will further strengthen the sustainability of the policy stance of an institution over its leader. In this context, Ind-Ra expects initial nervousness in the market to settle down in the course of the week.

Rupee to Take a Knock: Dr. Rajan was at the helm of steering the rupee amid extreme volatility in the 2013 taper episode. His effective resignation could therefore push the currency on the backfoot as an immediate reaction. Ind-Ra believes that while the exit in itself may not trigger major incremental portfolio outflows, the medium-term impact would be more pronounced. At the same time, investors will also be concerned over the management of the upcoming redemption of the FCNR B deposits, against the backdrop of a regime shift at the RBI.

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