Declining value of Indian rupee, widening current account deficit (CAD) and the impact of likely tapering of US bond purchases are some of the key issues which will keep Raghuram Rajan busy after he takes charge as RBI Governor on Wednesday.
Raghuram Rajan, 50, who has been in the Finance Ministry as the Chief Economic Advisor for barely a year, will replace D Subbarao as the Governor on September 4.
Besides combating the key issues like volatile Indian rupee and CAD, Rajan will have to take a call on continuing with RBI's practice of mid-quarter policy review every 45 days, which was initiated by D Subbarao.
There has been speculation that Raghuram Rajan is not in favour of mid-quarter reviews and could dispense with the practice, although the scheduled mid-quarter review due later in the month would be brought out.
Raghuram Rajan, a former IMF chief economist, was appointed as the Chief Economic Advisor in the Finance Ministry in August last year. His appointment as the 23rd central bank chief comes at a challenging time, when the economy is battling industrial slowdown, declining rupee, rising prices and all-time high CAD.
As regards the current account deficit, there has been some signs of improvement in the first quarter mainly on account of decline in gold imports.
However, the government and the RBI will have a difficult task of bringing CAD down to USD 70 billion in the current fiscal, from USD 88.2 billion last year. The rising cost of crude oil import will continue to put pressure on the CAD.
Impacted by high CAD, the rupee declined sharply touching an all-time low of 68.80 to a dollar last week. It, however, improved later and has been trading around 66 level.
On the positive side, the good monsoon and pick up in exports may bring some relief to Rajan, who will face a tough time in drawing a balance between the competing needs of keeping inflation under control and promoting growth.
His biggest challenge, however, will be to neutralise the impact of tapering of US bond purchases on which a decision would be taken by the Federal Open Market Committee (FOMC) in its meeting on September 17-18.
Known for his frank views, Raghuram Rajan was acclaimed for predicting the 2008 global financial crisis. In 2005, Raghuram Rajan had delivered a lecture critical of the financial sector, arguing that a financial disaster might be looming.