Rajan took over as the 23rd governor of the Reserve Bank of India on Wednesday. A marathon runner, Rajan will inherit an economy that is frail and fast losing steam and a currency that has seen a virtual free fall.
He is looked upon as one who is capable of more innovative approach rather than a straight-jacketed cookie-cutting policymaker, said Abheek Barua, chief economist at HDFC Bank.
Unlike his predeccesor D Subbarao, also a runner who incidently ran the Standard Chartered Dream run of 7 km, who took the mantle of RBI chief in the wake of Lehman collapse, Rajan will face headwinds from the unwinding of crisis-induced measures across developed economies.
The US Federal Reserves tapering of quantative easing or the Great Exit, as it is termed, is expected to hit portfolio inflows and possibly worsen Indias external sector concerns.
Market participants expect Rajan to tackle the currency crisis first in a more aggressive manner than his predeccesor Subbarao. In his capacity as the chief economic advisor, Rajan had said that he would handle all macroeconomic problems one at a time.
What the market expects of Rajan is to tackle the currency first with a combination of more direct intervention and also a little more of innovative approach to help banks and other entities bring in dollars, Barua said.
The rupee has lost 20% since April as a large current account deficit and a shrinking economic growth has put in danger the sovereign rating of the country. The CAD was at an all-time high of 4.8% of GDP in January-March. QE tapering fears and renewed geopolitical tensions due to the Syrian conflict have also added to the pressure.
Acredited with forecasting the breakout of the global financial crisis, Rajan is expected to fast-track the various options such as quasi-sovereign bond issues, more leeway for banks to attract non-resident Indian deposits and other such measures to stabilise the currency.
To navigate through the uncertainty, given Syria, US tapering, in terms of credentials and pedigree, Rajan is the right person, said Ananth Narayan G, head of global markets at Standard Chartered Bank.
While some expect him to roll back some of the measures taken to tighten liquidity, market participants said that he would rather wait for the outcome of the US Federal Reserves policy meet.
His approach is going to be a combination of pragmatism, keeping in mind the immediate need for currency stability, said Shubhada Rao, chief economist at Yes Bank.
According to Rajeev Malik, economist at CLSA, hopes that Rajan could fix all problems is unrealistic.
Further, even though Rajan is said to be a supporter of inflation targetting, market participants said that he would be more inclined to support growth.
Once the dust settles, he might be a little more comfortable with the idea of cutting rates, said Barua.
Indias gross domestic product (GDP) growth for April-June was 4.4%, a far cry from the 7-8% growth averaged before the start of the global financial crisis.
Economists expect some changes in the communication policy of the RBI as well. It would be interesting to see how Rajan deals with the finance ministrys coaxing on many issues, said the chief economist at a private bank.
The market wants Rajan to just bring clarity in the RBI communication. There has been so much confusion for the forex market over the last few weeks, said the head of trading at a foreign bank.