Macro Strategy


RBI governor resigns; GBP still under pressure
Radhika Rao, Philip Wee11 Dec 2018
    Photo credit: AFP Photo


    India: RBI Governor's resignation to raise risk premia

    The Reserve Bank of India Governor Urjit Patel announced his resignation on late Monday, with immediate effect. This comes at a sensitive time, when  negotiations with the government to iron out differences on key regulatory aspects are ongoing. First round of these discussions in November had seen the RBI cede some control to proposed committees, with a decision on liquidity due later this month. 

    Timing of the Governor's resignation and the already-cautious mood in the markets following yesterday's exit polls, to be followed by today's actual count for the state elections, will dampen sentiments. INR is likely to weaken past 72/USD as NDFs suggest, with Monday's equity sell-off to seek further downside. Bond yields had corrected sharply last week on the RBI's liquidity support, though profit-taking bids and uncertainty surrounding Governor's departure is likely to push 10Y INR yields back above 7.6% in a kneejerk sell-off.

    Beyond sentiments, markets will seek clarity on Governor Patel's successor, with the likelihood that one of the  current Deputy Governors might take over the mantle. A search panel might be formed, with a former Finance Secretary and Finance Commission member, also reportedly in the running. On policy, the RBI might soften its stance to adopt a more neutral-to-dovish approach as inflation continues to undershoot the 4% target and growth rolls off its peak. Markets are likely to price in a shift to neutral stance as early as the February 2019 meeting, which the narrative increasingly swinging towards cuts if inflation stays below 4% and global oil shows little signs of revival.

    Until nerves stabilise and changes, if any, to the liquidity stance, INR yields are likely to stay supported above 7.5%. Deputy Governor Acharya had suggested on 5 December that more OMOs are likely in the March 2019 quarter. Another INR800-1trn tranche in January-March 2019, could take this year’s cumulative OMOs to INR2.5-3trn. By November, these purchases have already amounted to 40% of the gross bond supply (till date). On net basis, the supply was in negative, this month and last. Shades of dovish underpinnings in the RBI guidance is likely to drive 2Y bond yields yet lower towards 7%.

    FX: GBP at the mercy of multiple political uncertainties ahead
     
    The British pound is set to depreciate to its post-Brexit referendum low around 1.20. Prime Minister Theresa May’s decision to postpone today’s parliamentary vote on her Brexit withdrawal agreement with the European Union led to a 1.3% plunge in the pound to an 18-month low of 1.2561 on Monday. With some 100 of her Conservative Party members against the agreement, the plan would have been rejected by a wide margin in the House of Commons.
     
    No date for a new vote is expected until May meets with EU leaders this week. She will first reach out to German Chancellor Angela Merkel today to seek reassurances on the Northern Irish backstop, and later with European Council President Donald Tusk and European Commission President Jean-Claude Juncker ahead of European Summit on Thursday and Friday. The EU has no intention to renegotiate Brexit and has asked its 27 members nations to prepare for a no-deal outcome. The European Court of Justice has, however, ruled that UK could revoke Article 50 without EU approval, which May has rejected.
     
    The final deadline for a vote is 21 January 2019, two months before Britain’s scheduled departure from the EU on 29 March. If May returns empty-handed, she could face a vote of no confidence by her own party. The opposition Labour Party could also table a vote of no confidence in a bid to force a general election. The pound will remain at the mercy of the multiple political uncertainties that lie ahead.

    Radhika Rao

    Economist – India, Thailand & Eurozone
    radhikarao@dbs.com

    Philip Wee

    FX Strategist - G3 & Asia
    philipwee@dbs.com

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