Although the Indian rupee remains on shaky ground, former Reserve Bank of India (RBI) governor Raghuram Rajan has allayed fears of it going into free fall. He said India’s central bank was correct in its use of interest rates to control inflation, Press Trust of India reports.

But he warned that the rupee could become significantly undervalued if it keeps falling at the current rate.

On Monday the rupee ended at a record low of 72.45 against the US dollar on growing fears of contagion from an emerging-market rout and the escalation of a global trade war.

Rajan said it was important for the RBI to continue to give the signal that it would keep inflation under check.

He also said India had to pay attention to the aggregate fiscal deficit, as state governments have increased their deficits.

Non-performing assets

As for the problem of bad loans, Rajan has blamed the “over-optimism of bankers” and “growth slowdown.”

He told the Indian Parliament’s Lok Sabha Committee on Estimates that banks didn’t do “due diligence” on large loans and relied on the promoter, SBI Capital Markets and IDBI. The former RBI governor added that the post-2008 slowdown made banks’ growth projections unrealistic.

The parliamentary committee had sought Rajan’s views on the banking sector’s mounting bad loans.

At the end of the April-to-June quarter, the total bad loans of India’s 38 listed commercial banks passed 8 trillion rupees (US$110 billion), with more than 90% of these troubled assets on the books of government-owned banks.