Markets likely to be rocked as RBI chief Urjit Patel quits

By Alasdair Pal

NEW DELHI (Reuters) - Indian stock, bond and foreign exchange markets are all likely to open lower on Tuesday after the shock resignation of the head of the Reserve Bank of India (RBI).

RBI Governor Urjit Patel said in a brief statement he had resigned for "personal reasons". He has clashed with the government over the central bank's independence, worrying investors in Indian markets, who will want to know who replaces him and the effect on monetary policy.

"Markets certainly will be concerned unless there is further clarification that comes through tonight," said R. Sivakumar, head of fixed income at Axis Mutual Fund.

Patel's departure comes at a critical time for Indian investors, just before a series of state elections on Tuesday, where the ruling Bharatiya Janata Party led by Narendra Modi may lose ground.

The central banker's resignation on Monday evening came after the majority of markets in India were closed, but futures contracts, which track the performance of asset classes outside of market hours, suggested significant declines were likely on Tuesday morning.

Indian rupee forwards tracking the performance of the currency against the dollar posted their biggest daily slump in more than five years on Monday.

The one-month contract was last quoted at 72.78 per dollar compared to a spot market rate of 71.35 percent dollar.

Exchange-traded funds tracking Indian stock markets and listed in Europe fell by more than 5 percent, suggesting India's stock market, which closed down by around 2 percent, might fall by more than 3 percent at the open on Tuesday.

The Swiss-listed Lyxor MSCI India UCITS ETF fell 5.5 percent. Similar funds listed in Germany and France were down by around 4.5 percent.

A 3.5 percent decline for the MSCI India International index would be its biggest drop for more than two years.

Longer-term, the government will need to be cautious of outflows from overseas investors, according to Ajay Bagga, a stock market expert.

"A lot of communication will be needed to foreign institutional investors to give them confidence," he said.

Yields on India's benchmark 10-year government bonds, which move inversely to prices, rose to a high of 7.59 percent after hours, according to quotes from some fixed income brokers in London, a rise of 1.6 percent.

(Reporting by Alasdair Pal, additional reporting by Suvashree Choudhury and Nidhi Verma; editing by Sanjeev Miglanim, Larry King)