RBI Governor Raghuram Rajan warns of 2013 rupee plunge repeat

Mumbai(dna): The Reserve Bank of India (RBI) governor Raghuram Rajan has warned of “taper tantrums” like the one India witnessed in May 2013, which debilitated the rupee to its historic low of 68.80 in August 28, 2013.

India, he said, needs to reduce its inefficiencies if it wants to insulate itself from the possible tightening by the US Federal Reserve.

In its 11th edition of the bi-annual Financial Stability Report, a dipstick survey on the health of the Indian banking sector, the central bank governor said, with the back to back quantitative easing (QE) stimulus programmes by other major central banks, alongside possible tightening by the US Fed, “what we have seen might be only one of a series of such tantrums that the global financial markets are likely to witness”.

Worsening asset quality of the Indian banks, particularly the public sector banks, is a matter of concern for the RBI. In its report, the central bank has also flagged off worries on the deteriorating asset quality of the banks.

“Though the risks to the banking sector moderated marginally, level of risk continues to be a matter of concern,” said the report.

In a foreword to the report, RBI governor Raghuram Rajan said the asset quality and the consequent pressure on the capital adequacy is a matter of increasing concern.

He said while India’s banking landscape is poised to change with the introduction of new types of entities like ‘small ?nance banks’ and ‘payments banks’, the role of public sector banks (PSBs) will continue to remain substantial in terms of supporting the needs of a sustainable and equitable economic growth.

“In this context, the continued stress on asset quality of PSBs and consequent pressure on capital adequacy is a matter of increasing concern. Hence, actions on part of the government, as also the RBI, in helping them overcome legacy issues, strengthening their governance structures, processes and improving their performance, are important,” said Rajan.

The Banking Stability Indicator (BSI) shows that risks to the banking sector moderated marginally since the publication of the previous report six months back though the level of risks continue to be a matter of concern.

Further, concerns also remain over the already deteriorated asset quality and lower soundness (though marginally improved) as also the profitability which remained sluggish. Further deterioration in the asset quality, if any, could adversely affect the health of the banking system.