Will Rajan's Departure Cast A Pall Over India ETFs?

In a surprise move, Raghuram Rajan – the former chief economist of the International Monetary Fund and the present governor of India’s central bank – announced that he would step down from his position once his three-year old first-term as a governor of Reserve Bank of India ends this September. He would return to academia after that.

With Rajan brining about the much-needed stability to the Indian economy over the last few years, such unexpected news dragged down Indian equity-index futures. The investing world did not seem comfortable with the piece of information that prime minister Narendra Modi was disinclined to extend Rajan’s term by two more years, as per financial times.

In fact several investors have now started to doubt if India’s growth and reform goals will be materialized timely.

Why Does Rajan’s Leaving Trouble Many?

Rajan has a proven track record and has been known for his excellence long before he joined as RBI governor. His upfront ‘warnings of the 2008-09 global financial crisis’ has earned him immense respect. Moreover, as an Indian central bank governor his contribution was commendable.

During his tenure, he shored up the Indian currency rupee -- which had been struggling hard for long. In fact, in a taper-trodden 2013, the Indian currency depreciated heavily on a stronger greenback. But Rajan reduced rupee swings by more than half and boosted the nation’s foreign-exchange reserves to an all-time high, as per Bloomberg.

Not only this, India was previously known for its sky-high inflation which Rajan controlled to a large extent. In fact, he applied an inflation-targeting regime and even cut key interest rates by 150 bps (read: India ETFs to Soar on Rate Cut?).

In this was not enough, under his supervision, the Indian economy grew 7.6% in fiscal 2016, marking the quickest pace in four yearsand higher than 7.2% in the prior year. This earned India Inc. trustworthiness among foreign investors (read: Indian Economy Steps Up: ETFs to Buy).

Also, Rajan was steadfast in cleaning up banks’ balance sheets that are messed up with bad debts. He had laid down a March 2017 target to fully ‘reveal the problem loans and make adequate provisions’. Now, many as started to fear whether Rajan’s descendant will be as active as him in stressed-asset management.

India ETFs in Focus

Needless to say, things will be uncertain till India announces who will assume Rajan’s position. Investors are likely to weigh up Rajan’s successor’s moves and credibility in the global investing world. The pace of implantation of the reform announced by prime minister Modi will also be closely watched.

Till then, India ETFs may see some volatile trading. This is truer given the ongoing global market turmoil due to Brexit fears and the uncertainty in the Fed’s policy tightening process (read: Market Fears Brexit: Volatility ETFs Take Full Advantage).

However, much higher growth rates compared to struggling developed economies may still be a point of attraction for many investors with a strong stomach for risks. Also, pro-growth prime minister Narendra Modi is expected to leave no stone unturned in delivering to this commitments in the days to come, making India ETFs solid bets even in the post-Rajan era.

iShares India 50 ETF (JK:INDY) ), WisdomTree India Earnings ETF ( (TO:EPI) ) and PowerShares India ETF (PIN) are some of the ETFs that will be in focus in the days to come.