FxWirePro: Indian rupee’s prospects in H2 seem fragile owing to RBI Rajan’s exit and political interventions

RBI Governor Raghuram Rajan resigned over the weekend bringing his tenure to an end. This comes after various coalition members in Prime Minister Modi's government criticized Rajan for not lowering interest rates even further in line with declines in inflation in recent quarters.

The lack of government commitment to extending Rajan's term gave the RBI governor little other choice (Rajan was open to a term extension according to reports). It's amazing how short politician's memories are.

Just three years ago India was ranked as one of the so-called 'Fragile Five' economies which were most exposed to a US rate hiking cycle.

In the meantime, INR has been one of the best performing (and least volatile) EM currencies due to Rajan's pre-emptive interest rate hikes and the ban on gold imports.

Those same politicians who criticize Rajan's policies would do well to consider the fate of other EM economies, which illustrated huge inflation increases and large currency depreciations in the same period.

Clearly Rajan's resignation is a malign development for INR and for the Indian economy as a whole. Investors can expect severe INR losses over the coming sessions.

More to the point, the resignation shows that despite all the talk of reform under Modi's government, there has been little progress in reality. The more things change, the more they stay the same.

The currency futures market for INR, the most traded dollar-rupee June contract on the NSE ended at 67.17. The June contract open interest was down 2.93% from the previous day.

July contract open interest was down 0.09% from the previous day. USDINR vol-adjusted carry has jumped back to pre-tapering levels. Earn carry through 2M USD put spreads.