After Raghuram Rajan’s announcement on Saturday to not take up a second term as RBI Governor, officials at the highest level in the finance ministry have discussed contingency plans to deal with any volatility in currency and stock markets on Monday.
“Few days back, the ministry had anticipated shock in markets following the revision of Mauritius tax treaty and had discussed ways to deal with the volatility, though that didn’t happen. The same way, this time around, officials have discussed ways to cushion the possible impact of Rajan’s announcement on markets,” a ministry official said.
Market regulator Sebi and stock exchanges have also beefed up their surveillance and risk management mechanism to ring-fence capital markets from any excessive volatility. Banks and forex dealers are also gearing up to meet any excessive money demand, especially for dollar, on concerns that Rajan’s eventual exit this September could trigger capital outflows.
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The regulator and the bourses would also keep a strict vigil for manipulators looking to exploit the volatile trends expected in stocks and derivatives, including those linked to rupee’s movement against other currencies.
Besides, brokers, portfolio managers and other market intermediaries would be under a close watch for any attempts to lure small retail investors into promises of hefty gains from the futures and options trading, especially in banking stocks and indices. The markets are also expected to be volatile ahead of the Brexit referendum this week.
“Only respite is that Rajan chose a Saturday to make the announcement as such a development on a weekday during trading hours could have been much more serious despite a robust risk management and surveillance mechanism in place,” PTI quoted a senior official as saying.
The regulators are especially worried after having seen the markets going into a tizzy recently just on unconfirmed reports that Rajan was not keen on a second term.
While announcing his decision against a second term, Rajan himself referred to the “imminent sources of market volatility like the threat of Brexit”, though he hoped that the RBI would be able to “ride out” these concerns. Rajan, who would have the shortest term as RBI Governor since 1991, further said that “international developments also pose some risks in the short term”.
He also said that RBI has “made adequate preparations for the repayment of Foreign Currency Non-Resident (B) deposits and their outflow, managed properly, should largely be a non-event”, referring to the concerns that the maturity of these bonds in September-October could impact the markets in terms of sudden pressure on the country’s forex reserves.
[with PTI inputs]