RBI Governor Raghuram Rajan on Indian rupee devaluation, inflation

Financial inclusion needed for sustainable growth: RBI governor

Updated: July 19, 2016 08:13 IST

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Reserve Bank of India governor Raghuram Rajan on Monday said that the current level of the rupee is pretty reasonable and any attempt to devalue it may lead to a surge in inflationary pressures and offset any benefits.

Delivering his address here at a seminar on ‘Equity, Access, and Inclusion – Transforming Rural India through Financial Inclusion’ organised by National Institute of Rural Development and Panchayat Raj, Rajan said that devaluation will lead to higher inflation. “Today’s rupee value is pretty reasonable. Devaluation will not necessarily help exports. India needs macro-stability, years of sustained growth,” he said.

“The issue of the value of the rupee is a complicated one. Some people think that for increasing exports, the answer is simply devalue the rupee,” Rajan said to a query on the devaluation of rupee to deal with the global slowdown. “First you have to ask how you devalue the rupee and certainly there are ways of doing it, but a lot of them require significant actions on the financial system. Some of our neighbouring countries have been using financial repression for a long time in order to sustain long-term undervaluation of their currency. The currency is a complicated animal.”

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He said India’s credit to GDP is 50%, which is significantly below when compared to some of the emerging markets such as China, where the value is 150%. “We need sustainable growth which is why we need systems in place, we need macro-stability in addition to the growth,” he said.

Stating that bankers usually focus on large borrowers with bottomline in mind, the governor said Aadhaar Enabled Payment System will go a long way in taking financial services to the underserved. “After all, should we not give everyone access to the (banking) services we all in this room enjoy?” Rajan asked.

He said that financial services institutions might want to move away from credit and focus on savings instruments while pushing for financial inclusion. The best way to characterise the impediments for financial inclusion are Information, Incentives, and Transaction Costs (IIT). The excluded may live in remote areas or may belong to communities or segments of society that undertake economic activity informally nor maintain records or have signed contracts or documentation. They often do not own property or have regular established sources of income.

Meanwhile, speaking at the Institute for Development and Research in Banking and Technology awards function, he said that network benefits from universal access is easier when the vast majority of beneficiaries have a bank account and the accounts themselves will be used heavily when account to account transfers are made easier through mobile phones via Unified Payment Interface (UPI) which is likely to become functional by month-end,’ he said.

He also suggested that electronic payment transactions can be incentivised. Both merchants and individuals should be encouraged to prefer electronic payments. “Merchants with increasing electronic transactions should be given tax credits by tax authorities,” Rajan said.

This article was first uploaded on July nineteen, twenty sixteen, at nine minutes past six in the morning.