MUMBAI • As if Brexit was not enough to worry about, India investors now need to cope with central bank governor Raghuram Rajan's impending departure.
The rupee, Asia's worst performing currency this year, slumped to its lowest level in four weeks yesterday, following Dr Rajan's weekend announcement that he plans to return to academia when his term ends in September.
"Clearly investors will not like this," said Mr Sean Yokota, the head of Asia strategy at Skandinaviska Enskilda Banken.
Since taking office in 2013, the former International Monetary Fund chief economist has helped strengthen the rupee, cut its swings by more than half and propelled India's foreign exchange reserves to an all-time high. Those moves, along with the implementation of an inflation-targeting regime, built India's credibility with investors and helped it overtake a slowing China as the world's fastest-growing major economy.
The rupee weakened 0.4 per cent to 67.3550 a US dollar yesterday and headed for its biggest drop in a week. That took its 2016 decline to 1.8 per cent, the worst performance in Asia. The currency is just 2.2 per cent shy of its record low of 68.845 in August 2013. It pared losses as the central bank was seen selling dollars, two Mumbai-based traders said.
Dr Rajan last Saturday expressed confidence that the policies he helped implement would protect Asia's third-biggest economy from the sort of sudden capital flight that occurred in the months before he took office, when the US Federal Reserve first signalled it would taper its bond purchases.
"We have worked with the government over the last three years to create a platform of macroeconomic and institutional stability," he said. "I am sure the work we have done will enable us to ride out imminent sources of market volatility like the threat of Brexit."
Dr Rajan plans to remain at the central bank until his term ends on Sept 4. Finance Minister Arun Jaitley said the government would announce his successor shortly.
Investors will likely remove capital from India and stay on the sidelines in the short term, said investment officer Nikhil Johri at Trivantage Capital Management India.
The S&P BSE Sensex has been one of the best performers in Asia over the past month. It rose 0.3 per cent yesterday even as the yield on India's benchmark 10-year sovereign bonds climbed two basis points to 7.52 per cent.
"Dr Rajan's decision will make international investors quite nervous about Indian markets," said Mr Johri, a former classmate of the bank governor in the 1980s.
Uncertainty about the Brexit referendum has cast a pall over the global outlook, spurring risk aversion across emerging markets. While the pound rallied yesterday after polls showed a swing towards the "Remain" campaign, a gauge of the rupee's one-month implied volatility jumped 43 basis points to 7.11 per cent.
Dr Rajan drew inflows of about US$34 billion (S$46 billion) through discounted foreign currency swaps. He also sought to build a war chest to help defend the rupee from global shocks, with about a fourth of India's foreign exchange stockpile being added during his term.
In December, he set banks a March 2017 deadline to clean up their balance sheets in a bid to reduce bad loans that are at a 15-year high.
Even with Dr Rajan leaving, India's world-beating economic growth and improvements to its current account and fiscal deficits have made it an attractive investment destination, analysts said.