MUMBAI, September 4, 2013 (AFP) - Top economist Raghuram Rajan, renowned for predicting the 2008 global financial crisis, took over as India's central bank chief on Wednesday as the country faces its worst financial storm in years.
Rajan, a former IMF chief economist, replaced Duvvuri Subbarao as governor of the Reserve Bank of India (RBI), which has been battling to prop up the plummeting rupee and reverse a sharp economic slowdown.
Rajan arrived at the RBI headquarters in Mumbai and met his new colleagues before a handover by Subbarao. He will take charge operationally on Thursday.
Speaking to reporters after the handover, Subbarao acknowledged his successor was in for a bumpy ride.
"The country could not have asked for a more capable person to lead the RBI in these most difficult times," he said.
Rajan is due to issue a statement at 5.30pm (1200 GMT).
Rajan, an outspoken diplomat's son described by the local media as an "economist with rock star appeal", takes charge as some analysts fear the once-booming economy could be heading for a meltdown.
The 50-year-old inherits an economy struggling with a record current account deficit, a currency which has lost up to a quarter of its value against the dollar this year and annual growth at its weakest in a decade.
Investors will be looking to Rajan, one of the few economists who warned that sub-prime lending could lead to calamity ahead of the 2008 crisis, to introduce policies to calm jittery markets and stabilise the rupee.
"It would be unfair to expect magic from one person," said Siddhartha Sanyal, chief India economist with Barclays Capital.
"But he is well-equipped to deliver the best one can, given his credentials."
Abheek Barua, chief economist with HDFC Bank, called Rajan "more innovative" than Subbarao, who spent five years at the helm of the RBI.
"I feel he will be more aggressive. His first task will be to stabilise the rupee and later help curb some of the liquidity-tightening measures to help drive growth."
The RBI has introduced a series of recent measures to try to halt the slide of the rupee, Asia's worst-performing currency this year, including raising short-term interest rates and tightening cash in the system.
Last month the RBI said Indian firms could only invest 100 percent of their net worth abroad in a bid to curb volatility, but on Wednesday it relaxed the measure which had spooked the market.
The bank clarified that firms could invest up to 400 percent of their net worth abroad if the funds are raised through overseas loans.
"It was not the intention of the RBI to restrict bona-fide and genuine overseas direct investment transactions by Indian companies," a statement said.
The rupee rose nearly 2.5 percent Wednesday to 66.92 after suspected heavy central bank intervention at 68.6 levels, dealers said.
The currency has been forecast by Deutsche Bank and Standard Chartered to slide to 70 to the dollar in coming months.
A depreciating rupee makes imports of everything from oil to coal and chemicals costlier, and comes as foreign capital inflows into India are drying up and the government is trying to plug the gaping current account deficit.
Analysts have raised fears India could face a crunch of the sort it suffered in 1991, when a foreign exchange-strapped government had to pawn its gold for an International Monetary Fund (IMF) bailout.
Rajan left his post as a professor at the University of Chicago's Booth School of Business and returned to India last year to become an adviser to Prime Minister Manmohan Singh.
Rajan has cautioned against any quick fix, saying last month that there was "no magic wand to make the problems disappear instantaneously".
India's economy grew by 4.4 percent in the first three months of the fiscal year, the slowest quarterly expansion since 2009.
The five percent growth rate last year was the lowest in a decade.
Adding to the gloom, a report from the World Economic Forum on Wednesday said India has slipped to 60th position out of 148 nations in terms of its global competitiveness, its lowest ever rank.
The government is desperate to kickstart growth before elections due by May. The RBI has come under growing pressure to cut interest rates but it also needs to counter high inflation.
Source - LBO