Terming devaluation of currencies as a “worrisome trend”, RBI Governor Raghuram Rajan on Thursday 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.