Brokerage Macquarie on Monday said the euphoria following the appointment of Raghuram Rajan as the new governor of the Reserve Bank of India (RBI) may be "short lived" as markets are placing "too much hope" on him to bring the country out of the current economic mess.
The former International Monetary Fund chief economist, announced a series of new steps to control the rupee's volatility on the very day he took charge of his office.
On September 5, the BSE Sensex soared 412 points to a three-week high after Rajan whetted the appetite of investors with a spate of measures including steps to boost the rupee and revive economic growth.
On September 6, the Sensex extended gains for the third session in a row, surging 290 points to close above the 19,000-level for the first time in three weeks as the rupee continued to strengthen.
"Much as we are happy about Rajan's appointment, we are also aware of the challenges he faces , both in terms of the economic problems facing India and also what awaits him in his dealings with politicians and the bureaucracy," Macquarie said in a research note.
"The positive reaction from the markets to Dr Rajan's appointment is similar to when Mr P Chidambaram took over as the Finance Minister and announced a series of reforms... Indeed there is no good precedent to this as Chidambarams big entry last year was somewhat dampened earlier this year when the market placed too much hope on the Union Budget, only to be disappointed when it didnt hear any big bang reforms," the note said.
He (Chidambaram) seems to be fighting a lone battle to meet the fiscal deficit target of 4.8 per cent while his party is busy rolling out the Food Security Bill, Macquarie said, adding that "Rajan will likely face similar issues in that his far reaching yet perceived 'radical' ideas may not find favour with the majority in the government."
According to Macquarie, monetary policy alone won't do the trick, as economic data continues to be weak, uncertainty around quantitative easing still persists and the earnings season next month is likely to disappoint.
"That said, better clarity on the RBI's stance and direction of future policy would go a long way in instilling confidence in markets," Macquarie added.
More measures are in the pipeline over the next several weeks, including the all-important RBI mid-quarter review on September 20 where the statement will likely be closely scrutinised for any major change in the central Bank's stance.
"We don't think there will be complete reversal in the RBI's current stance of maintaining tight liquidity else it runs the risk of yields falling and capital flowing out leading to further pressure on the currency and higher inflation expectations," Macquarie said.
With inputs from PTI