Mumbai: India`s rupee fell to a near one-month low and bonds weakened on Monday after central bank governor Raghuram Rajan, whose reforms have been credited for much of the economy`s success in recent years, announced he would quit when his term ends in September.
While the currency partially recovered losses, investors warn Rajan`s replacement, who is yet to be named, will need to be seen as credible and somebody who can defend the central bank`s autonomy at a critical juncture in its history.
A deeper selloff in the currency was also likely averted by central bank intervention with the Reserve Bank of India seen selling dollars via state-owned lenders to curb the fall in the rupee soon after the open of trading, traders said.
The rupee was down 0.5 percent at 67.39 to the dollar at 0655 GMT, having hit 67.70 to the dollar earlier in the session, its weakest level since May 24.
"Markets generally have come become more resilient to outflows to negative news given the improvement in fundamentals," said Mitul Kotecha, head of FX and rates strategy for Barclays in Singapore.
"A lot depends on who Rajan`s successor is, and on prospects of policy continuity. We will wait to see these factors."
Graphic: Indian economy reut.rs/1UFu5SB
The negative market response to the news was also mitigated somewhat by a wider Asian rally as fears that Britain would leave the European Union abated on Monday. The Nifty even gained 0.4 percent.
Analysts say the new governor would need to be a deft manager of currency markets, as India is bracing for about $20 billion in outflows starting in September as dollar-term deposits raised from citizens abroad during a currency crisis in 2013 mature.
Finance Minister Arun Jaitley on Monday sought to reassure investors about the ministry`s selection process for a new governor and the government`s commitment to the monetary policy reforms undertaken by Rajan.
"I am confident whoever is his successor will be a good person. The government will take a decision after deliberating all factors," Jaitley told Zee News TV network.
"The country`s economy is driven by strong fundamental factors. Essentially, Rajan`s contribution was good. I strongly feel that the economy will be on right track considering the environment."
The benchmark 10-year bond yield was up 3 basis points to 7.53 percent, after earlier touching as much as 7.55 percent, its highest since mid-March.
Though analysts had speculated Rajan might not pursue a second term, few had foreseen an announcement would come in the form of a letter to staff.
Rajan, a former International Monetary Fund chief economist, has been popular with foreign investors due to his efforts to tackle inflation and rescue India from its worst financial crisis in more than two decades when he took the role in 2013.
He also helped build foreign exchange reserves to a record high and implemented major market reforms including re-launching bond futures, while pushing to clean up the debt-laden banking sector.
Beyond his departure, India still retains significant appeal for investors and is seen better-positioned than other emerging markets to ride out volatility should Britain vote to leave the EU.
Meanwhile, investors are also hopeful Prime Minister Narendra Modi`s government can deliver promised reforms such as a nationwide goods and services tax.
Foreign investors have been net buyers of Indian shares since the start of March and have bought a net $2.8 billion so far this year, but sold a net $1.4 billion in debt.
"From a rating perspective, policies are more important than personalities," Fitch Ratings said on Monday, lauding the country`s progress in dealing with high inflation and weak bank balance sheets.
"Such institutionalisation implies support for these policies beyond the governor, also among government officials and broader within the RBI."