Reserve Bank of India governor Raghuram Rajan on Thursday cautioned against moves by different countries to depreciate their currencies, saying it was dangerous for the global economy.
Speaking at a conclave organised by the State Bank of India, Rajan said that weak demand in parts of the global economy was prompting countries to devalue currencies, which was a worrisome trend. “If China’s depreciation stays at these levels, I don’t see the need for worry. But if it’s just a beginning, there could be tit-for-tat actions,” said the central bank governor.
In a sudden development, on August 11, China surprised global forex markets by devaluing its currency, the yuan by 1.9%, and followed that with a series of more devaluations on two consecutive days. This action by the Chinese led to a fall in the value of currencies in most emerging markets as yuan’s depreciation made Chinese exports cheaper.
The depreciation of yuan has pushed down the rupee to two-year lows, with the currency trading at about 65.44 to the dollar. Rush by importers to buy dollars to meet their payment commitments are also seen as a factor for weakening the rupee.
Rupee's fall is also a concern as it could likely delay the RBI’s next round of monetary policy which is widely expected to see a cut in interest rates. Corporates have been eagerly awaiting the cut as it would spur investments and increase capex spends.
Elaborating on the importance of payments banks, Rajan said that grant of licenses for such banks will make the banking sector competitive. “If payments banks can access deposits from rural areas, it will bring down pre-emption from universal banks,” he said at the SBI conclave.
The central bank will announce small finance bank licenses next month.
On August 19, the RBI had announced an in-principle approval to grant payment bank licenses to 11 companies and individuals.