RBI’s Rajan warns against effects of China’s slowdown

  • Beena Parmar, Hindustan Times, Mumbai
  • Updated: May 26, 2016 17:55 IST
Reserve Bank of India governor Raghuram Rajan (REUTERS)

Reserve Bank of India (RBI) governor Raghuram Rajan has warned that a “sharp” slowdown in China’s growth poses a threat to the global and SAARC economy, highlighting possible impact from the shadow banking system of its neighbour.

Rajan said on Thursday that the sharp slowdown of the Chinese economy still remained a significant risk for the global economy and the SAARC region. He made the comments in a speech to central bank governors from the nations of the South Asian Association for Regional Cooperation (SAARC), RBI said in a statement.

The sharp contraction in China’s imports over the past year have already led to spillovers through the trade, confidence, tourism and remittance channels, and SAARC nations had not been able to avert its impact. More negative externalities could follow as Chinese economy adjusted to a more sustainable path, he said.

This is not the first time that Rajan has talked about the potential spillover from China’s economy to other countries, including India.

The SAARC region is facing newer challenges, as oil prices start to rise again (Brent crossed $50 to the barrel on Thursday), and the world is rocked by geopolitical risks in West Asia, apart from factors such as a possible Britain’s exit from the European Union, popularly termed Brexit, and suspense over the next interest rate hike by the US Federal Reserve. Volatility in financial markets due to risk-on or risk-off sentiment is also a potential risk factor, Rajan said.

“China already suffered from the twin-ailment of overcapacity and high leverage. Bad loans in the banking system were likely to grow over current levels and in addition there might be serious weaknesses in the shadow banking system, which could feed back to banks. Both could be significant downside risks,” the central bank governor said.

On India, Rajan said the cleaning up process of allocating public resources like spectrum and mines, as well as the process of appointing critical personnel, such as public sector bank chiefs, were important reforms undertaken by the government. “This is significantly increasing transparency in our system,” he said.

Being conscious of the role the Indian economy plays in influencing growth in other SAARC economies, India has kept the objective of securing and preserving macro-stability at the top of the agenda to avoid any negative externalities, Rajan said, adding that “Good policy has been essential to our stability”.

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