(11 DECEMBER 2018)DAILY MARKET BRIEF 2:Bank of India spikes rupee

USD/INR surged to 72.49 on unexpected news that the Reserve Bank of India’s Governor, Urjit Patel, has resigned. Patel said it was for personal reasons, but clearly, friction between the RBI and government was the real reason. A caretaker has been named until a permanent replacement is named. Watch for USD/INR to retest 70.

Changes in RBI staff are less of a worry for investors then the bank’s independence. With a shifting growth outlook, the credibility of policy makers is critical. There has been some improvement in INR, as local bond yields have retraced 10-15 basis points higher. However, the bigger clues will come on 14 Decembers at the next RBI board meeting. The RBI’s current easing bias does not support investing in INR. Markets are expecting weaker India growth in H1 2019, with lower inflation and a likely rate cut in Q3.