With a little help from RBI, Raghuram Rajan elevation, Indian rupee soars

Sep 04 2013, 21:18 IST
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Raghuram G. Rajan took over as the 23rd Governor of the Reserve Bank of India. The 50-year-old economist took charge from D. Subbarao at Reserve Bank of India head quarters(RBI) on Wednesday. Express photo by Prashant Nadkar Raghuram G. Rajan took over as the 23rd Governor of the Reserve Bank of India. The 50-year-old economist took charge from D. Subbarao at Reserve Bank of India head quarters(RBI) on Wednesday. Express photo by Prashant Nadkar
SummaryThe Indian rupee wiped out initial losses and made a smart recovery on Wednesday.

has been circumspect in public, revealing little about whether he will pursue the policies of his predecessor, Duvvuri Subbarao, or change tack.

"The rupee will be Rajan's first and key challenge. His IMF aura may help but he will need to win the market's faith by announcing something which helps bring in dollar inflows," said Vikas Babu Chittiprolu, a senior foreign exchange dealer at state-run Andhra Bank.

India's economy is reeling mainly from a dearth of investment and a slowdown in manufacturing activity and consumer demand.

Several banks, including Goldman Sachs this week, have cut their GDP growth forecasts to well below the decade low of 5 percent recorded for the year ended in March.

Traders said the economy has also been hit by the extraordinary measures from the RBI under Subbarao, who tightened cash conditions to make it harder to make speculative bets against the rupee and raised short-term interest rates.

Investors are showing little faith the government can push through substantial reforms, such as a hike in subsidised fuel prices, which could help revive confidence in the economy.

Prime Minister Manmohan Singh, in a statement ahead of a trip to Russia to attend the Group of 20 nations' summit on Thursday and Friday, said India would also need a more stable global environment.

"The Summit comes at a time when we in India have introduced several reform measures and taken steps to strengthen macro-economic stability, stabilise the rupee and create a more investor friendly environment," Singh said in a statement.

"At the same time, a stable and supportive external economic environment is also required to revive economic growth."

Global markets are weakening after leaders of a U.S. Senate panel said they reached an agreement on Tuesday on a draft authorisation for the use of military force in Syria, paving the way for a vote by the committee on Wednesday.

Worryingly for India, global crude and gold prices are surging. Oil and gold imports are big factors in the wide current account deficit.

The prospect that the Federal Reserve will unveil a plan after its policy meeting on Sept 17-18 to start winding down its monetary stimulus is also weighing on emerging markets, but India has fared worse than most because of the lack of confidence it can address its precarious deficits.

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