Not de­sir­able to use ex­change rate to spur growth: RBI chief

The Pak Banker - - COMPANIES/BOSS -

The Re­serve Bank of In­dia (RBI) and the govern­ment don't favour un­der­val­u­a­tion of the ex­change rate as a means to spur eco­nomic growth, RBI Gov­er­nor Raghu­ra­man Ra­jan said.

"There are those who ar­gue that in coun­tries such as China, Ja­pan and Korea busi­ness en­ter­prises grew via an un­der­val­ued ex­change rate," Dr. Ra­jan said at the In­dia MSME Sum­mit-2016 or­gan­ised by the Con­fed­er­a­tion of In­dian In­dus­try(CII) on Fri­day. "Such peo­ple want the same to be tried out in In­dia. How­ever there are a lot of prob­lems with un­der­valu­ing the ex­change rate and some of th­ese prob­lems are re­flected in the eco­nomic con­di­tion that th­ese coun­tries find them­selves in to­day."

The ex­change rate will not be a source of ei­ther com­par­a­tive ad­van­tage or dis­ad­van­tage, Dr. Ra­jan said. "I per­son­ally be­lieve that sus­tained un­der­val­u­a­tion over a long pe­riod of time is not a fea­si­ble or de­sir­able strat­egy. Which is why I firmly be­lieve that the RBI's phi­los­o­phy of not fo­cus­ing on the level of ex­change rate and try­ing to ma­nip­u­late it up or ma­nip­u­late it down but try­ing in­stead to min­imise sit­u­a­tions of ex­treme volatil­ity and in­ter­ven­ing in sit­u­a­tions when the ex­change rate be­comes ex­tremely volatile in ei­ther di­rec­tion is the right one," he said.

The In­dian ru­pee is one of Asia's worst per­form­ing cur­ren­cies against the U.S. dol­lar this year amid re­newed con­cern about the health of the world econ­omy and dwin­dling in­vestor con­fi­dence in Prime Min­is­ter Naren­dra Modi's abil­ity to push through eco­nomic re­forms. On Fe­bru­ary 12, the cur­rency com­pleted its big­gest weekly de­cline since mid-Jan­uary as over­seas funds fled the na­tion's stocks amid a global equity rout. The RBI wants the ex­change rate to be rea­son­ably pre­dictable and rea­son­ably sta­ble, Dr. Ra­jan said.

The ad­van­tage to Mi­cro Small and Medium En­ter­prises (MSMEs) should come from their ca­pa­bil­i­ties, cost-ef­fec­tive­ness and in­no­va­tive ideas rather than from un­der­val­u­a­tion, he pointed out. MSMEs can act as a means of so­cial em­pow­er­ment where dis­ad­van­ta­geous sec­tions of so­ci­ety can be em­pow­ered with money and wealth. How­ever, the idea should not be to re­serve en­tire sec­tors for MSMEs. "This would only en­sure that they re­main small al­ways. There is a need to fig­ure out a reg­u­la­tory en­vi­ron­ment that fa­cil­i­tates the growth and ex­pan­sion of MSMEs. There needs to be a level play­ing field and an easy frame­work of reg­u­la­tions for the en­try and growth of small in­dus­tries," he said. Lack of in­fra­struc­ture and lo­gis­tics, lack of ac­cess to mar­ket­ing, dif­fi­culty and the ex­pense in ac­quir­ing land and fi­nanc­ing are some of the im­ped­i­ments faced by MSMEs. "It is nec­es­sary that large com­pa­nies hand­hold MSMEs for the lat­ter's growth," Dr. Ra­jan said.

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