India rupee and markets up as Rajan boosts confidence

Watch: The new head of India's central bank, Raghuram Rajan, says he will take strong measures to tackle the issues facing the economy.

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The Indian currency and stocks have jumped a day after the country's new central bank chief took charge and promised tough action to boost growth.

The Indian rupee, one of the world's worst performers this year, rose 2.3% against the US dollar.

India's main stock index, the Sensex, closed up 2.2% on Thursday.

On Wednesday, Raghuram Rajan unveiled a series of measures aimed at propping up the currency and liberalising the country's banking sector.

"To a certain extent, the recent rupee tumble and instability in the financial markets has been a crisis of confidence," said Radhika Rao, an economist with DBS Bank.

"To that end, the path of action provided by the new governor and the stress on keeping communications predictable and consistent will be a welcome move."

Tough decision

One of the biggest issues facing the Indian economy has been the sharp decline in the rupee.

Start Quote

The fact that he has come with such pointed steps in mind shows that we will see more concrete steps very soon”

End Quote Siddhartha Sanyal Barclays

The Indian currency has dipped nearly 20% against the US dollar since May, as international investors pulled out money from the country.

The pull-out has been triggered by a range of factors, including slowing economic growth and a lack of key reforms. At the same time, a recovery in the US economy has also made India a less attractive option for investors.

India's central bank has taken some steps to try to maintain the rupee's value and also shore up confidence in the economy.

However, these measures, which include increasing duty on gold, imposing capital controls and raising short-term interest rates, have failed to have any significant impact.

When he took charge, Mr Rajan announced that some of the actions that he would take to tackle the issue "will not be popular".

"The governorship of the central bank is not meant to win one votes or Facebook 'likes'. But I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism," he said.

His statement has helped to restore confidence, with the Indian currency rising more than 2% to 65.53 rupees against the US dollar on Thursday.

'Pointed steps'

Mr Rajan also unveiled steps aimed at opening up the country's banking sector.

US Dollar v Indian Rupee

Last Updated at 29 Aug 2014, 16:20 ET USD:INR three month chart
$1 buys change %
60.5840 -
-0.04
-
-0.06

Under the new rules, Indian banks will no longer have to seek the central bank's approval for each branch they want to open.

However, the banks will be obliged to open branches in rural areas - in proportion with their expansion in the cities - in order to extend financial services to all areas of the country.

The central bank will also issue new banking licences, beginning next year.

He added that the central bank would also look at easing the requirement for banks to invest in government bonds, to free credit for productive parts of the economy.

Analysts said the moves indicated that Mr Rajan would take concrete steps to tackle the issues facing the country.

"Expectations were quite high from him and he has gone far beyond expectations on day one," said Siddhartha Sanyal, chief India economist at Barclays.

"The fact that he has come with such pointed steps in mind shows that we will see more concrete steps very soon."

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