Raghuram Rajan says he does not possess a magic wand to make Indian economy’s problems disappear but market participants expect out-of-the-box thinking from the new governor who unleashed a series of measures on his first day of office.
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 Reserve’s tapering of quantative easing or the Great Exit, as it is termed, is expected to hit portfolio inflows and possibly worsen India’s 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.