Rajan said on Saturday that he would not stay for a second term as Governor of the Reserve Bank of India in September and would return to the academic world.
His three-year effort to steer the economy and support a stable currency were widely popular and praised by international investors.
Old Mutual Global Investors head of Asian equities Joshua Crabb said the announcement is not too surprising.
“Impact to the market is relatively neutral, but it is very important that the market sees the authorities continuing the same policies Rajan has taken place,” including the reforms on inflation targeting policies and cleaning up bank loans, he said.
He noted his firm's Asia equity holdings haven’t been changed at this stage, although he is monitoring the market and could reduce exposure to take risk off if necessary.
The long-term view remains unchanged amid reform and growth expectations, he added. “The biggest questions would be around how international investors trade the currency and bond market. For the equity market, it would be fine.”
Matthews Asia portfolio manager Rahul Gupta said the reforms raised by Rajan are “already underway and should produce results even after his departure.
“Even though the direct style of communication as embodied by Rajan may change, the substance of RBI’s policies will endure,” he said in a statement.
However, he noted that the tailwind of low commodity prices, which has been helping India’s currency and trade, is less likely to exist going forward. “Therefore, the next two years could potentially pose a more difficult environment than the last three years.”
Sanjay Sachdev, chairman of Singapore-based emerging markets ETF provider Zyfin, treats “RRexit” as a disappointment to investors rather than a concern. He doesn't believe it will have a negative impact on India's financial markets.
There is some expectation of short-term volatility as markets wait for more clarity on the new governor’s name. But sentiment is likely to shift back to the focus on improved macro fundamentals.
Deutsche Asset Management APAC CIO Sean Taylor said although the RRexit might cause more volatility, it is not a big risk in the medium term. "The outlook for fixed income will be driven by the new appointment of the governor - whether it will come from the private or the government sector and how the governor will see the balance between growth and inflation.
"The outlook for equities should be more driven by earnings, and also more momentum in the reform process,” he noted.