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RBI’s Rajan takes a deep dive to save the rupee

Newly appointed governor of the RBI, Raghuram Rajan (L) addresses a news conference in Mumbai on September 4, 2013.
Punit Paranjpe | AFP| Getty Images
Newly appointed governor of the RBI, Raghuram Rajan (L) addresses a news conference in Mumbai on September 4, 2013.

Raghuram Rajan said he doesn't expect to get any "likes" on Facebook for the steps he plans to take as India's new central bank chief.

But by using his first day in the job to outline measures to save the battered rupee, the new Reserve Bank of India (RBI) governor may have helped draw a line under the currency's fall, analysts say.

(Read more: Baptism of fire for India's new central bank chief)

Rajan took markets by surprise on Wednesday by unveiling steps to liberalize financial markets and the banking system. He officially became RBI governor on Wednesday after his successor Duvvuri Subbarao's term came to an end.

Indian markets appeared to give their thumbs up to Rajan's measures; the rupee opened sharply higher on Thursday, trading at 65.82 to the U.S. dollar, up more than 4 percent from last week's record low. Stocks meanwhile soared 2 percent at the open to a three-week high.

(Read more: India central bank intervenes aggressively to support rupee)

"I don't think the rupee will go much past 70 and here's why: Rajan really gets it as far as liberalizing the banking system goes. He also said he would consider some acts that would be considered unpopular so he might raise interest rates 50 basis points in the near future," Ed Ponsi, managing director at Barchetta Capital Management, told CNBC Asia's "Squawk Box" on Thursday.

"That might be unpopular but you have to send a message to the market that the rupee will not crash," he added.

The rupee, this year's worst-performing major currency, is down almost 20 percent this year to the U.S. dollar. It has been pummeled by a weak economy, high inflation, a wide current account deficit and a perception that policy makers are not doing enough to get India's house in order.

No Facebook 'likes'?

Rajan, a former chief economist at the International Monetary Fund, said he planned to attract more foreign funds by subsidizing hedging costs for banks. He also said he would push for market liberalization and more rupee trade settlements.

(Read more: Emerging Asia rout start of a multi-year bear market?)

"The governorship of the central bank is not meant to win 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," Reuters reported the new RBI chief as saying.

Eswar Prasad, a senior professor of trade policy at Cornell University, said Rajan had made an important start in rebuilding confidence in India.

"The long-term measures he's [Rajan] announced are the ones that India's needs," he said. "He has done the two things that are crucial for India in the long-term, improving banking sector competition and measures to include more people in the banking system."

Rajan is the second central banker in Asia this year to hit the ground running. Bank of Japan Governor Haruhiko Kuroda used his first meeting as central bank chief earlier this year to unveil bold measures to revive Japan's economic fortunes.

(Read more: India swamped by a wave of growth downgrades)

Still, Rajan is RBI chief at a time of a storm in emerging markets as investors brace for an unwinding of U.S. monetary stimulus. And that means the battle to save the rupee may not be over yet.

"The rupee is at the mercy of the Fed tapering exercise, with most emerging markets with big current account deficits suffering," said Jeffrey Hally, senior manager, currency trading at Saxo Capital Markets. "And this story is not going to go away."

—By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC

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