The Indian rupee slumped as investors reacted to the news that Reserve Bank of India Governor Raghuram Rajan will return to academia in early September.

At India's central bank, the former International Monetary Fund chief economist not only oversaw a revolution in the conduct of monetary policy but also pushed for structural reforms and commented on fiscal policy, often drawing the ire of lawmakers in the process.

Rajan, along with Bank of England's Mark Carney, is one of the two 'rock star' central bankers of this generation. At the Jackson Hole symposium in 2005, he famously warned of excessive and growing imbalances in the financial system that manifested in the crisis of 2008.

A government official highlighted five possible successors for Rajan, but for now, analysts are scrambling to get a handle on what the governor's departure means and how markets are likely to be affected.

David Fuller's view

Governance is everything has long been a mantra at this service.  Confidence in the governance of countries and corporations leads to relative outperformance by attracting more investors whose interest and participation increases valuations.  For evidence, just look at Asia’s two giants. 

There are too many questions over governance in China, following the excessive monetary bubble just over a year ago.  Now China’s stock market languish despite comparatively low valuations for the Shanghai Stock Exchange Composite Index (SHCOMP) (p/e 15.92 and yield 2.12%), compared to the S&P BSE Sensex Index (SENSEX) (p/e 20.29 and yield 1.48). 

We learned that Narendra Modi was going to seek the nomination of Bharatiya Janata Party in September 2013, just after a temporary break beneath 18,000 for the Index.  Modi succeeded and then won the largest majority since 1984 in May 2014. Raghuram Rajan was appointed Reserve Bank of India Governor for a three-year term in August 2013.  Modi has not commented on Rajan in recent weeks but the Financial Times reports (PDF) that Subramanian Swamy of the BJP  attacked Rajan for “wilfully wrecking” the Indian economy and for being mentally not fully “Indian”.  

For the first two years of the government’s term I have often cited the combination of India’s Prime Minister Narendra Modi and Governor Raghuram Rajan of the Reserve Bank of India, saying that all other countries should be so fortunate.  Clearly, that is no longer the case following the damaging comments by Swamy, Modi’s BJP ally. 

International investors have been overweight India in recent years, on grounds of governance, strong GDP growth and the loss of confidence in China. Given all the Brexit drama seen in markets recently, they may not be fully aware of the fall out between the BJP and the RBI.  India’s stock market was firm today in line with the global rally but a decline beneath 26000 would be testing support.  More importantly, a break in the progression of rising lows since March would clearly show a loss of form.