As if by tradition, it has been baptism by fire for RBI Governors.

A crisis confronts every new appointee and there is no operating manual that he can readily refer for a solution.

It is not the best of economic times when Raghuram Rajan takes over as the 23rd Governor of the Reserve Bank of India.

The current incumbent D. Subbarao, took charge five years ago just as Lehman Brothers collapsed and triggered the global financial crisis. He was forced to rapidly unwind a lot of the tightening measures introduced by his predecessor, in order to infuse both liquidity and confidence.

The economy that Subbarao inherited was on a much stronger footing than the one he is handing over. When he took over as Governor in late 2008, the economy had just completed three straight years of 9 per cent plus growth. Today, GDP growth is down to 5.3 per cent. Inflation then was 4.7 per cent and it is now at 5.6 per cent. But this is after almost two stubborn years of near double-digit inflation. Fiscal deficit, which was at a manageable 2.5 per cent in 2007-08, was 5.2 per cent in the just ended fiscal. And current account deficit that was just 1.3 per cent of GDP has reached crisis proportions of 4.5.

Raghuram Rajan, thus, takes over at a time when the challenges are aplenty. The rupee is touching new lows every day having lost about 20 per cent in the last year. Other related matrices – the level of external debt, the proportion of short-term borrowings, and the level of import cover – are worrisome. Investor sentiment is down.

The prospect of a gradual withdrawal of the liquidity measures by the US Federal Reserve following improved prospects there is likely to see money flow out, further pressuring the rupee.

A flurry of announcements by the Government to encourage foreign investment flows after a prolonged period of policy paralysis has done little to bolster sentiment. And the country faces a general election in less than a year — a period that is usually marked by profligacy and largesse, if the past is anything to go by.

In short, it is almost as if the clock has been wound back by a little over two decades when India faced a major balance of payments crisis. Steering India away from that eventuality will be Rajan’s main challenge.

He will be hard pressed to ensure that he maintains the robust intellectual independence that has come to define the RBI Governor’s office. His credentials in this respect are impeccable. Rajan came into prominence eight years ago after challenging the Greenspan orthodoxy that held everybody in its thrall.

In his new role, Rajan will be tested again and again. He will have to maintain his independence and deal with the Finance Ministry’s pressure even while working in tandem. He will have to spar with some of the key people with whom he has worked closely in the last one year as the Chief Economic Advisor to the Government. Incidentally, the last three Governors had all done stints in the Finance Ministry in various capacities before their appointment at Mint Street.

There is plenty of tightrope walking ahead for the new Governor.

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