Rajan Says Some Rupee Depreciation Needed Until Inflation Falls

  • RBI chief focuses on rate-cut, financial services reforms
  • More lenders created to compete with India's traditional banks

Indian central bank Governor Raghuram Rajan said that a certain amount of depreciation in the rupee is necessary as he works toward bringing down inflation.

“Until we bring inflation down, that is our objective to bring it down to lower levels, there will be a certain amount of depreciation which is necessary to ensure we don’t become uncompetitive,” Rajan said in a speech in the southern state of Kerala on Saturday. “But our intent is not to depreciate the rupee in a steady way or anything of that sort. Our focus is on bringing down inflation so that people will not have to ask why the rupee is weakening.”

Consumer prices rose 5.69 percent in January from a year earlier after a 5.61 percent increase in December, the Statistics Ministry said in a statement on Friday.

Rajan is watching Prime Minister Narendra Modi’s budget as well as inflation to determine whether to add to four cuts last year. Profligate government spending would imperil Rajan’s 5 percent inflation target for March 2017 as the rupee tumbles toward a record low amid the global market selloff.

“If you look at the real effective exchange rate, it is flat,” Rajan said. “In other words we haven’t really depreciated in real terms against the global currencies.”

Micro Reforms

After spending the first half of his three-year term stabilizing the rupee and pushing down inflation, the ex-finance professor with a doctoral thesis in banking is now focusing on micro reforms to ensure rate cuts are shared quickly with customers and financial services reach India’s poor.

To achieve his goals, he’s working with the government to rid balance sheets of bad debt by March 2017. Rising stressed assets and inadequate risk buffers at India’s state-run banks have been hindering Prime Minister Narendra Modi’s attempts to revive lending growth in the $2 trillion economy.

Simultaneously, Rajan’s also creating more lenders to compete with India’s powerful traditional banks and push them to become more efficient. Come April 1, banks will also have to change the way they calculate a key lending rate to ensure they better reflect market prices.

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