RBI's Rajan Says Weaker Rupee Needed To Ensure Competitiveness

(RTTNews) - The rupee has remained flat against global currencies in real terms and some weakening of the currency is required to ensure competitiveness until inflation reaches lower levels, Reserve Bank of India Governor Raghuram Rajan said Saturday.

"We haven't really depreciated in real terms against global currencies. We have been very, very flat over the last couple of years," the central bank chief said at the 14th K P Hormis Commemorative Lecture, organized by Federal Bank, in Kochi in the southern state of Kerala.

The rupee is actually flat, Rajan said, citing the real effective exchange rate.

"Until we bring inflation down to lower levels, and that is our objective, there will be a certain amount of depreciation which is necessary to ensure we do not become uncompetitive," Rajan said in response to questions from the audience.

"Our intent is not to depreciate the rupee in a steady way…our focus is on bringing down inflation so that people will not have to ask why the rupee is weakening."

Annual inflation accelerated to 5.69 percent in January, official data showed on Friday.

The RBI Governor chose not to comment on fiscal deficit just days ahead of the budget. Finance Minister Arun Jaitley is set to present his third annual budget on February 29.

"I would definitely like more weight put on macro stability, because we can see around the world the consequences of losing that the effects on growth are much more severe if you lose macro stability than perhaps, if you gain a little more through additional stimulus," Rajan said.

Regarding the GDP calculation, Rajan said there was no reason to believe that the statistical office was not doing its best job.

With several Indian banks reporting poor results in recent weeks, Rajan said all banks are not in trouble and those having balance sheet issues have the potential to resolve them.

"The government is behind them, the Reserve Bank is behind them," Rajan said. "This is a problem we will fix without any doubt."

They will be strong and healthy banks at the end of the process, the RBI chief said. He also said it was a good development that banks are becoming more discriminating about credit.

Earlier this week, Rajan said the RBI is aiming for clean and fully provisioned bank balance sheets by March 2017. In his speech, Rajan said, "We need more participation in our financial market to increase the size, depth and liquidity."

The process of increasing participation must be undertaken in a measured way, he stressed.

"Moving forward step by step so that we build the resilience and depth in our system so that we are not overwhelmed by the volatility that surges through global capital markets," the RBI Governor said.

While more institutions are entering the banking sector, they are not the traditional ones, but the new kind that do different things, Rajan pointed out. "So after a decade or so of no entry, we have had two private banks enter last year, and this year as well as the next, a number of payment banks and small financial banks will enter," Rajan said. "And we hope to put the universal bank license back on-tap soon."

Increased competition in the banking sector, especially with the entry of several payment banks and small banks this year, will create a wide range of products that small customers can benefit from, Rajan noted.

He also sought decent compensation to attract professionals to join the boards of the public sector banks so that they can be run effectively. Turning to technology and innovation in banking, Rajan said, "As a regulator….we have to be conservative, and we have to create sometimes a certain bump in the road so that people won't go at breakneck speed."

He warned that 'exploding' products could have systemic consequences which may come to the fore only later, citing the sub-prime mortgages as an example. That said, experimentation must be tolerated, Rajan added. To promote financial inclusion, Rajan said granting access to payments and cash, and encouraging savings are important. "Credit has to be the last step in the process of inclusion," he said.

He also said that land is the less usable asset than it should be in India and the situation could be improved by digital mapping and better records. The new Bankruptcy Code, which is pending approval in the parliament, would resolve distress and failure issues much rapidly, Rajan said. The proposed law would also make the exit easier for failed businesses, he added.