India markets rally, new RBI chief fuels confidence but faces some skeptics

Thu Sep 5, 2013 3:31am EDT
 
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By Abhishek Vishnoi and Swati Bhat

MUMBAI (Reuters) - The rupee rallied and shares surged on Thursday after India's new central bank chief unveiled measures to support the ailing currency, providing a shot of confidence for investors unnerved by the country's worst economic crisis in two decades.

However, amid the euphoria over Reserve Bank of India Governor Raghuram Rajan's energetic Wednesday debut, investors warned he cannot by himself repair an economy mired by slowing growth and a record high current account deficit that has helped fuel a drop in the rupee of as much as 20 percent this year.

Rajan faces pressure from investors to roll-back the central bank's controversial steps to defend the rupee by draining cash from the market and raising short-term interest rates at a time when investors are clamoring for ways to boost growth.

The government has struggled to push through politically tough reforms needed to fix the economy, and elections due by next May raise the prospect of expensive populist spending that could threaten the country's sovereign credit rating, which is one notch above junk status.

"This is certainly not the bottom. Rajan means business, but most of his measures are just statements of intent, especially in the light of government finances being so precarious," said G. Chokkalingam, managing director and chief investment officer at Centrum Wealth Management.

"The continued deceleration of the industrial economy, the fiscal conditions, and the Fed tapering worries will continue to weigh," he said.

On Thursday, however, skepticism was trumped by euphoria over Rajan, a prominent former chief economist at the International Monetary Fund, who unexpectedly unveiled a flurry of proposals in his first day at the helm of the central bank.

The rupee rose as much as 2.3 percent to 65.53 per dollar, well off the record low 68.85 hit on August 28, when it was down more than 23 percent from its 2013 peak.   Continued...

 
Raghuram Rajan, newly appointed governor of Reserve Bank of India (RBI), arrives for a news conference at the bank's headquarters in Mumbai September 4, 2013. REUTERS/Danish Siddiqui