Kochi: Concerned about India being a country of “high inflation", the Reserve Bank of India (RBI) governor Raghuram Rajan on Saturday said it’s a must to bring inflation down to keep the country’s exchange rate competitive.

“Until we bring inflation down—our objective is to bring it down to lower levels—there will be a certain amount of depreciation (of the rupee), which is necessary to ensure that we don’t become uncompetitive," Rajan said, addressing an event organised by Federal Bank to commemorate the 14th memorial of its founder K.P. Hormis in Kochi.

The governor, however, said the intent of RBI is not to depreciate the rupee in a steady manner. “Our focus is on bringing down inflation so that people will not have to ask why the rupee is weakening," the governor said. “If you look at the real effective exchange rate, it (rupee) is flat. In other words, we haven’t really depreciated in real terms against the global currencies. We have been very very flat over the last couple of years.

“The bottomline is don’t just look at the dollar, but remember we are a country of high inflation. Elsewhere, they have deflation or 1 per cent interest rate, which itself is very high there. We have inflation of 5-6 per cent... yesterday, CPI came out at 5.69 per cent," Rajan explained.

On Thursday, the rupee had hit a fresh 29-month low of 68.30, which is close to the lowest level it had touched on 28 August 2013 at 68.85. It recovered 7 paise on Friday. The rupee pain follows massive pullout by foreign investors from the country since the beginning of the year. While FPIs have pulled out over ₹ 83,000 crore from the domestic market, mostly equities, they pulled back over ₹ 23,000 crore in the first 11 days of this month.

Amid mounting bad loan worries at public sector lenders, Raghuram Rajan said there is no question of going back on the clean-up drive even as he assured full support to all banks including those with problems on their balance sheets.

Rajan, who has set a deadline of March 2017 for the banks to clean up their balancesheets resulting into huge losses being booked by many lenders and sharp profit plunges by others, also asserted that the government and the regulator would not let the system fail. He also hoped that the banks with weak balancesheet would also be able to withstand the turmoil.

“Not all our banks are in trouble. There are very strong banks in the system. The banks that have some balance sheet issues have the potential to resolve them. The government is behind them, the Reserve Bank is behind them," Rajan said.

Stating that there was no going back on the clean-up drive, Rajan said, “This is a problem (of NPAs), we will fix without any trouble. I don’t doubt that at the end of this process, the franchise value of these banks will come to the fore in a full-fledged manner and that they will be strong and healthy soon." Rajan’s comments came on a day when public sector lender Bank of Baroda reported a massive ₹ 3,342 crore loss for the third quarter—the biggest ever quarterly loss for any lender in the country.

Earlier on Friday, IDBI Bank had reported a net loss of ₹ 2,183.7 crore. Many of these banks have disclosed NPAs close to 9%. Earlier this week, the country’s largest lender SBI reported a massive 67% plunge in its net profit and warned of an equally bad quarter or two. Many mid-sized public sector lenders like Oriental Bank of Commerce, Central Bank of India, Allahabad Bank and Dena Bank have also reported deep losses while large ones like Union Bank of India and the Punjab National Bank have reported massive drop in profits.

Even private sector banks like ICICI and Axis Bank have also reported higher NPAs and lower profits this quarter following the RBI diktat on asset quality review. The impact of these poor numbers on their stocks has been such that most of the state-run banks are trading below their book value and their combined NPAs are more than double their market capitalisation.

Almost all banks have been reporting large bad loans and the resultant losses/decline in profit following an RBI directive which asked them to make provisions for as many as 150 top troubled accounts. The system as a whole has over ₹ 8 trillion bad loans which is more than 11% of the system as of the September quarter.

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