Terming devaluation of currencies as a “worrisome trend”, RBI Governor Raghuram Rajan today said China’s move to devalue its currency and to protect its stock markets raise questions about the ‘true strength’ of the world’s second largest economy.
“I think more generally across the globe, because of a weak demand, we’ve seen significant efforts to depreciate currency, you can call it monetary policy or direct exchange rate intervention. That’s a worrisome trend.
“The Chinese move raised some questions about the true strength of its economy also,” Rajan said, speaking at the second SBI Banking and Economics Conclave.
He added that China has moved on various fronts beyond the currency, including protecting its stock markets.
Moves like these, where countries devalue currencies due to low demand, can lead to a “free for all” at the global stage, said Rajan, who is known for his frank views on the global economy.
Rajan, who is credited to have seen the global financial crisis of 2007-08 coming, said that rupee has been among the more stable currencies the world over, although it has also depreciated a bit.
“We have also seen certain sectors where a strong currency has hurt us,” he said, while citing the example of cement sector where production has fallen despite a high domestic demand.
Rajan pointed out that the dip is due to the slowdown in exports as there is slower demand overseas.
On the way ahead, Rajan said, “We do not have much to worry if the level of Chinese currency depreciation stays at current level, but more such moves can result in troubles including “tit for tat” actions by other nations.
“If Chinese depreciation holds at current level, it’s not something we need to be overly concerned about. If it is the beginning of a more longer term depreciation, certainly the actions don’t suggest so far. But if it is part of process of gaining competitive advantage, it has to be worrisome across the world. You could have tit for tat actions,” he said.
“We will have to wait and watch the situation,” he added.
Last week, an unexpected devaluation of the yuan by China saw it plunge the most in about 20 years, sending shockwaves across the currency markets globally. Among others, rupee was also affected, but RBI is said to have intervened in the forex market to cushion the drop.
The Chinese central bank lowered its daily reference rate by 1.9 per cent last Tuesday, a move termed by many as an effort to cushion weakness in its economy.
The introduction of Payments Banks will make banking “exciting” for the customers, Rajan said.
Bhattacharya had asked whether payments banks could lead to a “worry” and eat into the low-cost deposit base for banks as the new banks have the option to accept deposits.
Rajan said there is no threat to the banking system and the PBs will serve as a feeder for the existing banks.
The bank branch can become a centre of activity, helping with cash handling or do some completely new work.
“There is a lot of scope for everyone, not everybody will succeed but this is a revolution which can happen,” he said.
He also thanked Nachiket Mor for the work he has done on the PBs and quipped that the new banks can also be called “Mor Banks”.
Amongst those selected by the Reserve Bank include Reliance Industries, Airtel, Aditya Birla Group among others, to start a Payments Bank. They have an 18-month window in which they can submit their plans and get the final license.
Rajan further said there is a pick up in the economy and the rural economy may also see an uptrend if monsoon improves and sowing is good.
He also raised questions on the true strength of Chinese economy and said India shouldn’t be concerned if yuan depreciation holds at current levels.
On the banking sector’s bad debt problems, Rajan said the NPAs covered under credit guarantee trust for medium and small enterprises were high.
Besides, small companies were facing liquidity problem due to non-payment of bills, including those by the government.
At the event, Bhattacharya said that the stress level in mid-corporate banking segment was coming down.