Reserve Bank of India governor Raghuram Rajan called yesterday for global central banks to adopt a system for assessing the wider impact of their actions, including unconventional monetary policies now in use.
Rajan proposed that a group of academics should measure and analyse the “spillover” effects of monetary policies and indicate which should be used and which avoided. He suggested a traffic light system, grading policies green, orange or red.
The monitoring system could be implemented through an international agreement along the lines of the Bretton Woods currency accord or via the International Monetary Fund.
Rajan’s speech was the highlight of a three-day International Monetary Fund event in New Delhi, attended by IMF chief Christine Lagarde and Indian Prime Minister Narendra Modi, at which worries about the global economy were front and centre.
“The international community has a choice,” Rajan said. “We can pretend all is well with the global financial non-system and hope that nothing goes spectacularly wrong. Or we can start building a system for the integrated world of the 21st century.”
Rajan’s speech came days after the European Central Bank eased monetary policy further by cutting all its main interest rates, expanding asset purchases and launching a loan programme which could see it pay banks to lend to firms and households.
The Bank of Japan has also taken interest rates into negative territory for the first time while the US Federal Reserve is expected to tighten monetary policy only gradually after years of near-zero rates and quantitative easing.
Rajan has been a vocal critic of such policies, saying central banks seeking to fulfil domestically focused mandates are ignoring the impact of their actions on the global economy.
Yesterday’s speech was the most comprehensive given on the subject by Rajan, who is widely credited with having predicted the global financial crisis that began in 2007.
The former IMF economist, tipped by local media as a potential successor to Lagarde, also called on the Fund to take a lead role in ensuring policies adopted by its members do not have “beggar-thy-neighbour” consequences.
“We need new rules of the game, enforced impartially by multilateral organisations, to ensure countries adhere to international responsibilities,” he said.
Lagarde had advice of her own, urging Asian nations yesterday to employ growth-friendly monetary and fiscal policies to counter challenges posed by a fragile global economy.
When Rajan became RBI governor in September 2013, India was in the midst of its worst currency crisis in more than two decades as fears the Fed would begin tightening policy exposed the country’s weak finances and big current account deficit.
India eventually stabilised the rupee, partly by building up its foreign exchange reserves, but his ringside view of the crisis has made him a strong critic of the kind of stimulus measures adopted by developed economies in recent years.
Yesterday, he warned that such policies spook people into fearing “calamity is around the corner”, leading them to save rather than to spend and thus diminishing any benefits.
Rajan has stated India will not follow other countries and devalue its currency, a view endorsed yesterday by Prime Minister Narendra Modi, who ruled out ‘beggar thy neighbour’ policies.
Early in his tenure, Rajan raised interest rates to tackle double-digit inflation but the RBI cut by 125 basis points last year as consumer prices eased, to help boost an economy growing fast by global standards but below its potential.
Markets expect another 25 bps cut in the next month after the government stuck to its fiscal deficit target for the year starting in April.
That pledge was praised by Rajan, although he declined to comment on whether it would affect the central bank’s monetary policy stance.