China Devaluation a risk, if Long-Term says Raghuram Rajan

Mumbai, Aug 20: Repeating his warnings about global markets being at risk of a crash due to competitive loose monetary policies adopted by rich nations, RBI Governor Raghuram Rajan on Thursday said the recent devaluation of the Chinese currency poses a risk only if the depreciation continues for “longer term”.

“If Chinese depreciation holds at the current level, it’s not something we need to be overly concerned about. If it is the beginning of a more longer term depreciation, if it is part of a process of gaining competitive advantage, it has to be worrisome across the world,” Rajan said here at the State Bank of India’s Banking and Economics Conclave.

“You could have tit-for-tat actions,” the Reserve Bank of India chief said.

“We will have to wait and watch the situation,” he added.

In a move to deal with current economic weaknesses, the Chinese central bank lowered its daily reference rate by 1.9 percent last week, that rocked currency markets globally, affecting also the rupee.

Pointing to the very low interest rate policies of the US Federal Reserve, the Bank of Japan and the Bank of England in a bid to stimulate their economies, Rajan has been warning that emerging markets are especially vulnerable to big shifts in capital flows triggered by unprecedented monetary accommodation in rich countries.

“I think more generally across the globe, because of a weak demand, we’ve seen significant efforts to depreciate currency; you can call it monetary policy or direct exchange rate intervention. That’s a worrisome trend,” he said.

Moves like these, where countries devalue currencies due to low demand, can lead to a “free for all” on the global stage, he added.

Predicting the 2008 financial meltdown, which is still affecting global economy, Rajan in 2005 had argued that increasingly complex markets with myriad instruments of credit and mortgage-backed securities in ever greater quantities had made the global financial system a risky place.

Rajan also said the consequences of the Chinese devaluation have been felt on some of India’s export items.

While there was a pick-up in the economy, Rajan said Indian exports continued to remain a worry and the RBI would keep an eye on exports in the coming times.

Exports during last month fell by 10.30 percent at $231.37 billion from $257.92 billion during July last year. Exports during June stood at $222.89 billion.

The downturn is a fallout of the prolonged worldwide economic slowdown, and a historic plunge in oil prices that has affected the price of petroleum products. (IANS)