Reserve Bank of India (RBI) Governor Raghuram Rajan on Monday said that neither RBI nor the government intends to "undervalue" the rupee to pursue growth unlike countries such as China and Japan because it leads to a lot of problems over time. Inaugurating the 4th edition of MSME summit here, he said undervaluation of the domestic currency's exchange rate is "not the intent of RBI and Government of India".
Some people point out that the growth of countries like China, Japan and Korea was due to undervaluation of exchange rate and they also want India to follow the same path. He said however that there are a lot of problems with undervaluation over time, which is reflected in the situations that some of the countries find themselves today.
Pointing out that sustained undervaluation for a long period of time "was not a feasible or desirable strategy for growth", he said this was why he "firmly believes that RBI's philosophy of not focusing on the level of exchange rate.... trying to manipulate up or down...but trying instead to minimise situation of extreme volatility".
He added: "So, rate will not be a source of competitive advantage or disadvantage. We want to make reasonable, predictable, reasonably stable and let the advantage (for growth) come from capabilities of MSME's from cost effectiveness, innovations and ideas, rather than some kind of exchange rate valuation".
Rajan said that he was not in favour of stretching norms for non-performing assets (NPAs) or bad loans as investors will not get the true state of balance sheets. He said it is useful to keep the NPA norms constant and by changing the definition of bad loans will only "dilute and obscure account".
Major state-owned banks in the country including SBI have been reeling under NPAs leading to erosion of profits on account of higher provisioning for bad loans in the third quarter of the current fiscal. "NPA norms are not about saying that a person is bad.
They are about accounting and if we continuously stretch the NPA norms, the investor will have no idea about the true state of balance sheet of the bank.