Reserve Bank of India (RBI) governor Raghuram Rajan on Friday minced no words in criticising some countries’ “unconventional monetary policies” of cutting interest rates incessantly and depreciating their currency.
This, he said, had led to a “musical crisis”, as policy sent it from one region to another. Seven years after the crisis began, the world has still not got back to reasonable growth. The crisis has moved from the US to Europe, and is now afflicting emerging markets like China.
“This is where unconventional monetary policies come up... If we depreciate relative to their currency, their people will buy our goods. As they buy our goods, we get taken along. Let’s force these guys to provide growth to us,” Rajan said at the Habitat Annual Lecture in New Delhi, a typically strong speech that is fast becoming the RBI governor’s hallmark.
China, most notably, has been making news of late for cutting interest rates and devaluing the Yuan to arrest falling growth. In some developed countries, interest rates are down to near zero, even negative.
The problem is that when the underpinning of growth is not the monetary policy spurring domestic investment but a depreciating exchange rate taking demand from other countries, it creates an unsafe environment. “I do some unconventional monetary policy, capital flows out of my country, capital flows into my neighbouring country, that country’s exchange rate appreciates, I get growth for a while. But as capital flows into that country, its real estate prices increase, people demand too much, its debt levels increase, that country’s economy becomes fragile,” said Rajan.
He pointed out that misguided monetary policies had caused much pain in the past, right from Mexico to the East Asian economies in the 1990s, and then the US and Europe in this century.
It does not help that new inventions like Google, Twitter, and Facebook do not increase economic activity much. “The problem with technology employment is distribution. The gains go to a few people.”
The need of the hour, Rajan said, was a re-thinking of the global financial architecture, with an umpire that pronounces whether a country’s monetary policy is good or bad.
But there is a vacuum in global governance, with the US, which provided leadership for a long time, backing off after it got entangled outside a little more than it wanted, and Europe mired in its own problems.
It is time, therefore, for emerging markets like India to take more responsibility. “We have to set the agenda and take responsibility,” said Rajan.