A prescription for the IMF

Reserve Bank of India Governor Raghuram Rajan, known for his forthright and plain-speaking manner, has once again > trained his guns on the International Monetary Fund — where he once served as Chief Economist. The world’s premier multilateral lending institution, he said, had failed to fulfil its role in ensuring that national monetary policies did not end up hurting the global economy as a whole. Speaking at a preparatory meeting of a think-tank contributing ideas for the G-20 meeting in Turkey next month, Dr. Rajan reiterated a charge he had laid against the Fund in a speech in May to the Economic Club of New York: the IMF, he said, had been sitting on the sidelines and applauding unconventional and extreme policies initiated by central banks in the industrialised countries. These policies of quantitative easing, combined with the exchange-rate interventions pursued by some emerging market economies in the early-2000s, had created problems for others with large negative spill-over effects by pushing capital from one shore to another. With national central banks unlikely to consider the impact of their policy actions beyond the respective domestic economies — at best they would consider the second-level consequences on major trading partners — the Fund ought to have evaluated the implications from a global perspective, according to Dr. Rajan. That talks at the IMF’s latest meeting in Lima have flagged a potential emerging market crisis is vindication enough for the Indian central bank chief that the policies to tackle the earlier situations including the sub-prime and European crises have only ended up moving the predicament from one country to another, or from one region to another. The way to get out of this regime of rolling crises, as he termed it, would lie in concerted global action.

For the economist-turned-central banker, widely credited with having predicted the 2008 financial crisis, the concern about the lack of a global policy consensus is born of a very real predicament. Having just

> cut the benchmark interest rate by a higher-than-expected 50 basis points with the aim of providing a monetary fillip to domestic demand, Dr. Rajan is well aware that a resurgence of inflationary pressures amid distinct signs of a drought across several key States could leave the RBI facing the spectre of tepid economic growth and accelerating price gains. And with

> persisting uncertainty over when the U.S. Federal Reserve would start normalisation of interest rates, the outlook for the global economy remains hazy. The world having strayed into competitive easing willy-nilly, the need of the hour, according to Dr. Rajan, is a political consensus to go beyond domestic mandates and evolve optimal policies that help create global economic growth. Whether the G-20 leaders would pursue Dr. Rajan’s call and push for more concerted and wider political action on this front, given the common imperatives, remains to be seen.