Rupee, bond worries as RBI gets new chief

Dr Patel.
Dr Patel.

MUMBAI • As Dr Urjit Patel prepares to take charge at India's central bank, investors in the nation's rupee and bond markets have the most at stake.

That is because current governor Raghuram Rajan's term, which ends on Sept 4, has so far brought them the best payoffs when compared with his two predecessors'.

Total returns from investing in the rupee outpaced every emerging-market peer other than the Argentine peso.

Dr Patel's reputation as an inflation hawk - and recent data, which showed consumer price gains had breached the central bank's upper bound of 6 per cent - may stand the currency in good stead, even as it raises questions about the sustainability of this year's bond rally.

Investors have heard little from Dr Patel during his 31/2 years as deputy governor as he has rarely spoken publicly. The 52-year-old is known for having helped Dr Rajan spearhead the biggest reforms in the Reserve Bank of India's 81-year history, including implementing an inflation target and cleaning up debt-saddled banks.

LOW PROFILE

Outside of monetary policy, one will have to wait and see what Dr Patel's views are, say, in the areas of market development, banking health, financial stability.

MR ANANTH NARAYAN, head of Asean and South Asia financial markets at Standard Chartered, on Dr Patel.

His first challenges will come almost immediately: managing an outflow of maturing foreign- currency deposits and overseeing the effective operation of the proposed policy-setting panel.

"Bond markets will likely - at least initially - view Dr Patel as an even stronger proponent of the current inflation-centric monetary policy framework, and to that extent, will trade cautiously," said Mr Ananth Narayan, the regional head of Asean and South Asia financial markets at Standard Chartered.

"Outside of monetary policy, one will have to wait and see what Dr Patel's views are, say in the areas of market development, banking health, financial stability."

The yield on notes due in January 2026 rose four basis points to 7.14 per cent at 10.10am yesterday, while the nation's benchmark stock index dropped 0.2 per cent after changing direction at least five times after trading began yesterday .

After his elevation to governor early next month, the Oxford- and Yale-educated Dr Patel will also make an attempt to take his predecessor's war against the nation's state-dominated, bad loan-plagued banking system to its logical conclusion.

That final battle must involve taking away from spoiled lenders the soothing comfort of investing in government bonds, which is what they do when they want to erase the consequences of their lending mistakes by earning a dribble of risk-free profits.

Dr Patel gets three years to persuade Prime Minister Narendra Modi's government that the socialist era has passed.

The authorities do not need to force banks to buy their bonds. There will be enough investor demand as long as a modicum of fiscal discipline is maintained.

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on August 23, 2016, with the headline 'Rupee, bond worries as RBI gets new chief'. Print Edition | Subscribe