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New RBI governor Rajan may face short honeymoon

Analysts say it is a mistake to believe the suave star economist, whose first day on the job last week was likened to the "central banking equivalent of a blockbuster movie opening," is a miracle man who can rescue India's ailing economy.

india Updated: Sep 08, 2013 09:32 IST

The euphoria which greeted new Reserve Bank of India (RBI) governor Raghuram Rajan has been unprecedented in India's normally sober financial world but the honeymoon may be shortlived.

Analysts say it is a mistake to believe the suave star economist, whose first day on the job last week one financial daily likened to the "central banking equivalent of a blockbuster movie opening," is a miracle man who can rescue India's ailing economy.

"There was tremendous elation among market participants over Rajan's appointment," Ajay Bodke, strategy head at Mumbai investment house Prabhudas Lilladher, told AFP.

"But we need to temper that exuberance and look dispassionately at the economic fundamentals and that picture is not good," he said.

The former International Monetary Fund chief economist has been plunged into a maelstrom of a record current account deficit , a hefty fiscal deficit, stubborn inflation, a weak currency and a sharp economic slowdown.

Analysts say Rajan, famed for forecasting the 2008 global financial meltdown, can provide symptomatic relief by using various mechanisms to lure overseas funds to cover the high current account deficit.

But the government holds the most important levers for reviving economic growth, cutting public subsidies and the twin deficits and restoring foreign investor confidence, analysts say.

"The government needs to take decisive measures to signal to international markets that India is taking the path of fiscal rectitude and shunning the path of populist prolificacy," Bodke said.

With elections due by next May and the government struggling in the polls, it may be hard for the ruling left-leaning Congress party to take any tough decisions, analysts say.

For instance, India urgently needs to cut diesel subsidies to lower its massive fuel import bill which is ballooning its current account deficit -- but foreign minister Salman Khurshid conceded Friday such a move "has political implications".

The economy has gone dramatically downhill since the the last decade when growth regularly topped 8% and 9% while the UPA government has become mired in corruption scandals that sent foreign investors fleeing.

The economic slowdown risks a shortfall in the government's tax revenue projections, exacerbating the fragility of India's finances.

India's economy grew 4.4% in the quarter ended June, the weakest pace since 2009 when the world was reeling from the international financial crisis.

Now the country is being called the "sick man of Asia" and is facing the threat of becoming the first of the BRICS nations of Brazil, Russia, India, China and South Africa to lose its investment credit status.

Still, Rajan, 50, has hit the ground running.

In his first speech Wednesday, he outlined plans to draw more funds from abroad to support the rupee and free up financial markets and the banking sector.

The rupee has lost nearly a fifth of its value against the dollar since the start of the year.

Rajan radiated an energy that contrasted with the normal crawling pace of policymaking in a performance which was both "bold and brilliant", wrote Raghuvir Srinivasan, business editor of The Hindu newspaper.

So far, the so-called "Rajan-effect" is holding.

The BSE benchmark Sensex surged more than 1,000 points in the last three trading sessions while the rupee staged a strong rally to reach 65.24 to the dollar, up from a record low of 68.85 hit last month.

But banking giant Barclays noted India still faces risks from more global financial market uncertainty as an expected paring of US stimulus triggers outflows from emerging markets as well, as the threat of higher oil prices amid turmoil in the Middle East.

Rajan has a "mountain to climb", The Hindu noted.

Analysts say he is in a policymaking box as India confronts its worst financial crisis since 1991 when it was forced to pawn gold in exchange for an IMF bailout.

Despite clamour from business for lower borrowing costs, analysts say he cannot loosen monetary policy to spur the economy for fear of propelling high inflation higher and weakening the rupee further.

In fact, Rajan's comments suggest he is likely to be "more hawkish", said CLSA economist Rajeev Malik said.

The former top finance ministry advisor and professor at the prestigious University of Chicago's Booth School of Business has sought to temper expectations of what he can do, saying he has "no magic wand".

"Any entrant to the central bank governorship probably starts at the height of their popularity. Some of the actions I take will not be popular," he declared in his inaugural speech.

"The governorship of the central bank is not meant to win one votes or Facebook 'likes'."

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