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Can the new RBI chief survive India's 'poisoned chalice'?

Hindustan Times | Getty Images

The appointment of a renowned economist as the new head of the Indian central bank seems like a promising step towards turning around the country's battered financial markets, but analysts CNBC spoke to are in broad agreement that Raghuram Rajan has his work cut out for him.

The former chief economist at the International Monetary Fund inherits an economy struggling with the slowest growth in a decade, rising inflation, a hefty deficit and a battered down currency, together with long-standing issues like India's much needed deregulation of its industry.

(Read More: India's current account good news may be fleeting)

"Rajan can't exactly be said to be facing the easiest of tasks. The words poisoned and chalice spring to mind," said Robert Prior-Wandesforde, head of Southeast Asia and India economics at Credit Suisse bank.

"Rajan was wise to point out that he doesn't have a magic wand that will fix the economy's considerable woes," added Prior-Wandesforde.

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Rajan, who is economic advisor to the Prime Minister and the Ministry of Finance, has been tasked to head the Reserve Bank of India (RBI) for a three-year term, replacing incumbent Divvuri Subbarao, who retires next month.

The appointment of the engineer-turned-economist, who is widely acclaimed for having predicted the 2008 global financial crisis two years before it struck, has been mostly met with positive feedback from the financial community.

Still, observers are questioning how much of a difference Rajan can make. Tackling the 'droopy rupee,' which has lost 11.5 percent against the dollar this year, will likely be Rajan's priority, but many India watchers were doubtful he can pull that off.

"What he can achieve in the current circumstances is very limited," said Anantha Nageswaran, CEO at independent consultant Vansight.

"He can only continue to keep interest rates high as the current incumbent has done two weeks ago," he added.India's central bank has spent the past month unleashing rupee-supportive measures, including intervening in the foreign exchange market, draining liquidity and raising short term interest rates.

(Read More: Is India's rupee back in the danger zone?)

The measures have done little to prop up the currency, which fell to a a fresh record low of 61.86 on Tuesday. According to Nageswaran, Rajan's hands are tied as the majority of India's problems, to a large extent, are the responsibility of the government.

"India's economic crisis has been a problem of governance and that falls squarely on the shoulders of the government," Negeswaran said.

"The government is unlikely to do anything dramatically meaningful and positive for the economy in terms of uplifting the aggregate supply, which is what will bring down the current account deficit and restore long term growth prospects," he added.

(Read More: This market may be a'slow moving train wreck')Frederic Neumann, MD & co-head of Asian economics research at HSBC also voiced concerns over Rajan's limited power.

"What ails India is the lack of structural reform and the central bank can only do so much. One of the main challenges for Rajan will be that India is moving into pre-election season just when he takes over and the question is will the government play ball," added Neumann.

By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

Contact Asia Economy

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