Urjit Patel's resignation as Reserve Bank of India (RBI) governor will not go down well with the markets, which were under the impression that the relationship between the central bank and the government had thawed.
Patel’s decision was announced post-market hours and a day before assembly election results in five states. The markets could see a bloodbath on Tuesday if election results throw up a negative surprise, analysts said.
“The development came as a bolt from the blue. This was not expected at all. The markets were under the impression that the relationship between the government and the RBI had thawed over time. If the state polls throw up any negative surprise for the current dispensation at the Centre, expect a bloodbath on Dalal Street on Tuesday,” said Ambraheesh Baliga, an independent market analyst.
The rift between the RBI and the government turned ugly after RBI deputy governor Viral Acharya in October went public saying undermining a central bank's independence could be "potentially catastrophic."
The government, on its part, had called for the RBI to relax its lending restrictions on some banks. Reports also indicated that the government was mulling to invoke the never-before-used powers under the RBI Act (Section 7) allowing it to issue directions to the central bank governor on matters of public interest.
U R Bhat, managing director at Dalton Capital agreed and said development and its timing could lend a double blow to the markets. After the initial reaction, Bhat says, the markets will keep a tab on who succeeds Urjit Patel as the new RBI governor.
“Mr Patel’s resignation ahead of the state poll outcome will cast a shadow on how the markets play out amid the outcome of the state election results. That said, I think this (resignation) was in the making. Sooner or later, either the governor or the government had to give in,” he said.
"The market is presently being impacted by the global sell off and domestic political concerns. Once these issues die down the market will stabilise. The resignation of the RBI Governor is a short-term sentimental negative. But this is not likely to impact the economy and the market beyond the very short term, provided we get a good reputed person as a replacement," said Dr. V K Vijayakumar, chief investment strategist at Geojit Financial Services.