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Current position of rupee is pretty reasonable: Rajan

RBI Governor Raghuram Rajan today said 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'.

Current position of rupee is pretty reasonable: Rajan
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Reserve Bank Governor Raghuram Rajan

Hyderabad

He also said that India has to go a long way to reach the per capita GDP level of China and needs many more years of sustainable strong growth.

Rajan was speaking at an interactive session at National Institute of Rural Development and Panchayati Raj.

"The issue of value of the rupee is a complicated one. Some people think that to increase exports, the answer is devaluing rupee. There are, strictly, ways of doing it (devaluation), but lot of them require significant actions on the financial system that some of our neighbouring countries used for long time," Rajan replied to query on the devaluation of rupee to deal with the global slowdown.

"It has lot of side effects including.. the inflation will pick up in this country if you have to pay significantly more for your imports. You have to pay significantly more for your oil, it will have inflationary impacts.

"It (devaluation of rupee) may offset any benefits you get from the devaluation. My belief is that today's value of the rupee is pretty reasonable and I don't think we should emphasise moving one way or the other as the answer to any problem," he said.

On growth, Rajan said India's growth rate has to be stronger and sustainable to reach Chinese levels.

He said: "China's per capita GDP is about four times of India today. So yes, we have a long way to catch with the level of per capita GDP and that means many years of strong sustainable growth.

"I want to emphasise here, because a few years of growth will not help. After those few years, we have very slow growth. We need sustainable growth which is why we need systems in place, we need macro-stability in addition to the growth."

He said India's credit to GDP is 50 per cent, which is significantly below when compared to some of the emerging markets such as China, where the value is 150 per cent.

Rajan explained economic impediments to greater financial inclusion through the acronym IIT - information, incentives, and transaction Costs.

He said, the banker, especially if he is not from that region, will have difficulty in getting sufficient information to offer financial products to the excluded.

Also, the lender may also not have incentives to lend to the excluded as the legal system does not enforce repayment quickly or cheaply and the borrower does not have any collateral to pledge, he added.

The third impediment, Rajan outlined, was transaction costs. Since the size of transactions by the poor, or by micro farmers or enterprises is small, fixed costs in transacting are relatively high.

"If the time and cost involved in filling up a form and documentation for a client, for instance, is the same for a loan of say Rs 10,000 and Rs 10 lakh, a banker who is conscious of the bottomline would naturally focus on the large client," Rajan said.

The governor focused on three elements of financial inclusion - broadening of financial services to those people and enterprises who do not have access to financial services, deepening of financial services and greater financial literacy and consumer protection.

"One of the primary motivations for the country to push financial inclusion is to free the excluded from the clutches of the moneylender," Rajan said.

A moneylender does not suffer any of the impediments faced by banks in extending credit to underserved, he said as he proposed three public policy approaches to overcome this - mandates and subventions, transforming institutions, and moving away from credit.

Mandates, Rajan said, are reasonable from a societal perspective but the banks cannot monetise this benefit, only a government can decide to mandate them.

There are risks emanating from mandates, he said, adding "narrow targeting of mandates to the truly underserved and explicit payment for fulfilling the mandate are necessary so that they are delivered by the most efficient."

Another approach, he said, could be transforming institutions. He said local financial institutions, with local control and staffed by knowledgeable local people, could be more effective at providing financial services.

The third approach, Rajan said, could be to let credit follow not lead. The government and RBI are doing this by encouraging easing of payments and remittances, on expanding remunerative savings vehicles, or on providing easy-to-obtain insurance against crop failures, he said.

"Savings habit, once inculcated, not only allows the customer to handle the burden of repayment better, it may also lead to better credit allocation," Rajan said.

He also outlined five issues that arise in managing the process and the RBI was trying to simplify those - know your customer requirements, encouraging competition to prevent exploitation, ensuring some flexibility and forgiveness in financial arrangements, the need for skilling, encouraging financial literacy and ensuring consumer protection.

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