Rexit may unsettle sanguine investor sentiment: Brokerage firms

Kotak Institutional Equities said most FPI investors view India as a preferred and stable market in an uncertain world

Investor optimism over the Indian markets is likely to be unsettled by RBI chief Raghuram Rajan's no to a second term and stock markets will wait for more clarity on his successor, say brokerage firms.

India's stock market, which has "rich valuation" compared with its emerging market peers, is a preferred one among foreign investors, especially on the back of complementary policies of the government and RBI, they said.

Rajan made a surprise announcement over the weekend that he would not take a second term at RBI.

Brokerage firm Kotak Institutional Equities said Rajan's decision "will likely unsettle investors sanguine about India".

"While some knee-jerk reaction to this event is quite possible, we expect the markets to wait for more clarity on the new Governor's name and more importantly, his views on continuity versus change," brokerage firm Citi India said in a research report.

"If the new Governor is able to strike a right balance between the two, then he will gain credibility and market focus is likely to shift back to improved macro fundamentals."

The report, jointly authored by economists Samiran Chakraborty and Anurag Jha, said Rajan's announcement -- on June 18 -- caught the market by surprise as it came with less than a week to go for the Brexit vote.

"Maintaining continuity in the central bank stance is a key metric of a stable economy. We think that some of the changes brought in by Rajan (flexible inflation targeting doctrine, CPI headline being the target) are irreversible," the report said.

"However, the new Governor might have different views on appropriate level of real interest rate, pace of attaining the 4% target, given growth considerations and liquidity management framework."

Recovering from its early morning plunge, the BSE Sensex today soared 241 points as the government unleashed a new wave of FDI reforms and Brexit worries eased while hectic buying by institutions and talking-up by influential marketmen helped counter Rexit jitters.

"Most FPI investors view India as a preferred and stable market in an uncertain world, given the powerful appeal of its macro-economic stability, ongoing economic and social reforms and long-term growth prospects," Kotak Institutional Equities noted.

According to the report, investors would now have to grapple with Rexit and a possible Brexit in the next few days.

A play on Brexit, Rexit refers to Rajan's decision not to seek a second term as Governor.

"The market will now go into overdrive with speculation about Rajan's successor after being in overdrive with respect to his extension in recent weeks," Kotak Institutional Equities said.

"India's rich valuation reflects the comfort of investors... The complementary policies of the government and RBI have played a big role in India becoming one of the preferred markets for foreign investors (both direct and portfolio)," the report added.