Raghuram Rajan Explains His ’Global Crash’ Warning

Mangalore Today News Network

New Delhi, Aug 12, 2014: Reserve Bank of India Governor Raghuram Rajan on Monday said his warning about a global markets "crash" last week was not aimed to "preempt" another crisis, but to highlight the pitfalls of using monetary policy to revive growth.

"My colleagues in industrial countries are trying too hard (to revive their economies), and I would prefer monetary policy to do less and other parts of the economy, including the political system, to do more. If we try too hard, then we raise the probability of a crisis," said Dr Rajan, who is famous for predicting the 2008 financial meltdown.

Overnight interest rates in the US have been near zero since December 2008, when the Federal Reserve started buying bonds to kick-start the stalled US economy. The Fed’s easy money policy has helped drive up prices in risk assets across the globe, particularly in emerging countries like India.

Year-to-date overseas investors have pumped in over $25 billion (around Rs. 1.5 lakh crore at 60 rupee per dollar) into Indian debt and equity markets. The surge of money has sent the Sensex to record highs and supported the rupee.

Rising shares and a stable rupee have masked the fundamental problems of the Indian economy, which has grown at sub-5 per cent for two consecutive years. Dr Rajan has resisted pressure to ease interest rates to boost growth and has stuck to a hardline stance of controlling inflation to 6 per cent by January 2016.

"Instead of the political system taking action, reforming the economy, etc., as industrial countries also need reforms, they are relying on the monetary authorities to provide whatever boost that was required.

"I thought this was dangerous because monetary authorities across the world are boosting asset prices rather than real activity," the RBI chief said.

Dr Rajan warned that India will be at risk if industrial countries start raising rates. Higher interest rates in the US may lead to a reversal of portfolio flows from India, which could adversely impact the rupee, stocks and property prices.

"We will be tested by capital outflows and my hope is that we have done enough in terms of strengthening the macroeconomic fundamentals of the country...as well as in building up reserves," he said.

India’s foreign exchange reserves of $320.56 billion in the week to August 1 are close to surpassing a record high of $320.785 billion in September 2011.

Courtesy:NDTV