Foreseeing India as one of the top five global economies 10 years down the line, Reserve Bank of India governor Raghuram Rajan on Tuesday said time has come for developed nations to take ownership for the global impact of their monetary policy decisions.
Delivering a lecture titled ‘Rethinking the Global Monetary System’ at London School of Economics, Rajan started ominiously: “We really don’t have anything in place today.”
“First reaction of any such thing is yes, this is a guy from an emerging market which has no international responsibility,” he said. “The answer is, by the time any of this gets made into policy, I have no doubt India will one of the top three or five global economies. I think it is time we started this discussion.”
The adverse spillover effects of aggressive monetary policies by central banks have been around for some time, he said: “The fact that the policies in some industrial countries affect sentiment in my markets on a daily basis is something that was not intended by them. (But) it is a fact of life and we need to deal with this because it puts constraints on policy in my country”.
Market indices in India and other developing countries look to the US, Europe, Japan and Shanghai for cues, and volatility in excess of 2% has been set off by monetary stimulus decisions of the US Federal Reserve and Japan’s central bank.
Rajan said the way forward is for developed nations to assume more international responsibility. But before that, more analysis must be done by unbiased experts in academic institutions on the net spillover effects.
“We need rules of the game based on how policies play out in the short term versus long term, whether they have positive or negative effects on the rest of the world, and whether they are clear or fuzzy,” Rajan said.
“And here we can use the same analogy as the WTO, we can ascribe colours to policies. Those that have net positive effect on country as well as zero to positive effect on the rest of the world gets a green label; policies that are uncertain, short term negative but long term positive, may be more of an orange label, and policies that may be positive for your country but certainly negative for the rest of the world, gets a red label; (other) countries should shun those country’s policies”.
Rajan said the global financial system was nowhere near establishing what these policies might be, but once reasonable number of studies are completed, international discussions could begin.
The lecture marked the inauguration of the ‘100-Foot Journey Club’, a collaboration between the Indian high commission and LSE’s South Asian Centre.