Reserve Bank of India (RBI) governor Raghuram Rajan on Thursday said that he would not be overly concerned if the depreciation of the Chinese currency held at the current level but added it could become “worrisome” if this was the beginning of a longer-term depreciation process.
“The Chinese move does raise questions about the true strength of the Chinese economy,” the governor remarked at the State Bank of India (SBI) Banking Conclave, adding that it does ripple across the global economy. “You have seen many currencies have depreciated in tandem, we have depreciated some,” he observed.
Rajan said he anticipated tit for tat actions from other nations, if the depreciation continued.
The governor also said licences for small banks were likely to be awarded next month. On Wednesday the central bank gave in-principle approvals to 11 players, allowing them to set up payments banks. Rajan said that he saw the payment banks complementing the universal banks by traversing the last mile, rather than competing with them. “I don’t think the 11 banks are a competitive threat to the existing banking system. I see them as an add-on,” he governor said.
Rajan explained the RBI board had decided to allow a variety of players in order to experiment with models. He saw a greater chance of small finance banks migrating into universal banks rather than payments banks doing so. “I don’t see that change from payments banks to universal banks. When we talk about migration we talk about a long time, proving yourself in that area gradually,” he added.
Responding to a suggestion by SBI chairman Arundhati Bhattacharya on allowing banks to drop interest rates for home loan products with a view to reviving consumer demand, the governor said the central bank would examine the idea. “Some front-loading by banks may be useful,” he said, adding that if real estate developers sitting on unsold stocks start bringing down prices, that will be a big help to the sector. “Once there is a sense that the prices have stabilised, more people will be willing to buy,” Rajan said. The governor observed that there have been signs of pick-up in the economy and further improvement in rural demand hinges on the prospects of the monsoon.
“Hopefully, if the monsoon does not deteriorate and in fact improves, sowing has been very good, you may see rural demand coming back more strongly,” Rajan said. According to the latest India Meteorological Department forecast, the monsoon deficit could widen to 12% for the year and may impact kharif output.