Speculation is gathering in Indian financial circles over who will be the next head of the central bank in Asia’s second largest fast-growing economy, with the term of the present governor set to expire in the first week of September.

Yada Venugopal Reddy has steered the Reserve Bank of India through one of the most prosperous periods in the nation’s post-independence history during his five-year term, with annual economic growth of more than 9 per cent.

But with India now facing high inflation and domestic political uncertainty as the Congress party-led coalition government prepares to face an election early next year, markets are increasingly nervous about his imminent replacement.

Presenting possibly his last policy announcement on Tuesday, Mr Reddy was typically evasive on who might replace him or whether his term might be extended.

Asked if his final remarks at a press conference on the announcement were the last time he would be addressing the public as the governor, he joked: “These concluding remarks are the concluding remarks of this session.”

A jovial career bureaucrat with the elite Indian Administrative Service, some have criticised Mr Reddy for acting too slowly in the face of a growing asset bubble, particularly in the property market, over the past few years, when India drew record amounts of foreign portfolio and direct investment inflows. And some economists believe he should have begun increasing interest rates sooner this year when inflation suddenly began to shoot up.

Because of rising food and oil prices, inflation is now at a 13-year high of almost 12 per cent, more than double the RBI’s target level of less than 5.5 per cent. Yet Mr Reddy has taken decisive action only in the past two months, with three interest rate rises that have brought the key lending rate to a seven-year high of 9 per cent.

But he has faced obstacles. Last year, record foreign fund inflows strengthened the rupee against the dollar, hurting politically sensitive export industries such as the textile sector. Raising rates then would only have worsened the problem.

Beyond reining in inflation, his replacement will face challenges such as whether to allow greater foreign participation in the banking sector, how to foster a more vibrant bond market and how to refocus the bank on fighting inflation rather than managing the currency.

One source within the government said rumoured potential candidates in-cluded Rakesh Mohan, one of his RBI deputies, and Planning Commission deputy chairman Montek Singh Alhuwalia, an adviser of Manmohan Singh, the prime minister. Rakesh Mohan would bring plenty of experience in government and the RBI to the job. The Princeton- and Yale-educated bureaucrat is doing his second stint as a deputy governor after stints at the Finance Ministry

An appointment of Mr Alhuwalia could prove more controversial. India’s opposition might not welcome the appointment of the Oxford-educated liberal economist so soon before an election, given his close relationship with the government.

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