The immediate resignation of Reserve Bank of India Governor Urjit Patel comes at a sensitive time, when negotiations with the government to iron out differences on key regulatory aspects are ongoing, the Singapore banking group, DBS, said on Tuesday.
"Timing of the Governor's resignation and the already-cautious mood in the markets following yesterday's exit polls, to be followed by today's actual count for the state elections, will dampen sentiments," Radhika Rao, economist at DBS Bank said.
The bank further noted that the uncertainty surrounding the Governor's departure is likely to push 10-year INR yields back above 7.6 per cent in a knee-jerk sell-off, while, the Indian rupee is likely to weaken past 72 per USD.
Beyond sentiments, markets will seek clarity on Governor Patel's successor, with the likelihood that one of the current Deputy Governors might take over the mantle.
A search panel might be formed, with a former Finance Secretary and Finance Commission member, also reportedly in the running. On policy, the RBI might soften its stance to adopt a more neutral-to-dovish approach as inflation continues to undershoot the 4 per cent target and growth rolls off its peak.
"Markets are likely to price in a shift to neutral stance as early as the February 2019 meeting, which the narrative increasingly swinging towards cuts if inflation stays below 4 per cent and global oil shows little signs of revival," said DBS.
The Bank further pointed out that Deputy Governor Acharya had suggested on December 5, that more Open Market Operations (OMOs) are likely in the March 2019 quarter. Another INR 800 - 1 trillion tranche in January-March 2019, could take this year's cumulative OMOs to INR2.5 to 3 trillion, it said.
Shades of dovish underpinnings in the RBI guidance is likely to drive 2-year bond yields yet lower towards 7 per cent, believes DBS.
Meanwhile, Singapore-based financial analysts said the sudden resignation of a financial stalwart such as Patel affects investors' confidence in the country.
"This is shocking. Why he has to resign this week, ahead of the RBI meeting," said a financial market analyst focused on India. Financially, India remain a stable economy with bright outlook. But politically, there is a deep concern about prospects as a large scale development is underway in the country which seeks global investments, said the financial market observers.