Raghuram Rajan, Governor of the Reserve Bank of India (RBI), has asserted that the current non-system in international monetary policy is a source of substantial risk, both to sustainable growth and to the financial sector.
Addressing the Economic Club of New York on Tuesday, he said it was not an industrial country problem. It was also not an emerging market problem. “It is a problem of collective action. We are being pushed towards competitive monetary easing and musical crises,’’ he said.
The text of his speech has since been put up on the RBI website.
“I use Depression Era terminology because I fear that in a world with weak aggregate demand, we may be engaged in a risky competition for a greater share of it. We are thereby also creating financial sector risks for when unconventional policies end,’’ he added.
He argued for stronger and well-capitalised multilateral institutions with widespread legitimacy. Some of them could provide patient capital while others could monitor new rules of the game, he said.
“We also need better international safety nets. And each one of us has to work hard in our own countries to develop a consensus for free trade, open markets, and responsible global citizenry. If we can achieve all ,this even as recent economic events make us more parochial and inward-looking, we will truly have set the stage for the strong sustainable growth we all desperately need,’’ he added.
Mr. Rajan dwelt on a number key issues confronting the global monetary policy planners in a dynamic new world. He elaborated in detail the emerging penchant for unconventional monetary policy and its fall-out on the emerging markets.
“Unconventional monetary policies include both policies where the central bank attempts to commit to hold interest rates at near zero for long, as well as policies that affect central bank balance sheets such as buying assets in certain markets, including exchange markets, in order to affect market prices,’’ he said.
He said there was clearly a role for unconventional policies.
“When markets are broken or grossly dysfunctional, central bankers may step in with their balance sheets to mend markets,’’ he said.
“The key question, however, is what happens when these policies are prolonged long beyond repairing markets to actually distorting them,’’ he added.
