India’s RBI chief seeks ‘new rules’ for central banks


Indian Finance Minister Arun Jaitley (L), Prime Minister Narendra Modi (C) and Managing Director for the International Monetary Fund (IMF) Christine Lagarde

India’s central bank chief on Saturday said “new rules of the game” were needed for monetary policy-making, arguing that greater oversight was crucial in an increasingly integrated global economy.

Respected central banker Raghuram Rajan proposed a traffic light-style system whereby a central bank’s policies could be rated red, orange or green depending on their level of harmful “spillover” effects.

“The international community has a choice. We can pretend all is well with the global financial non-system and hope that nothing goes spectacularly wrong,” Rajan, governor of the Reserve Bank of India, told an International Monetary Fund conference in New Delhi.

“Or we can start building a system for the integrated world of the twenty-first century,” he said.

Across the world, central banks have resorted to stark measures in recent years in an attempt to kick-start growth in their sluggish economies.

The Bank of Japan and others have cut interest rates below zero while the European Central Bank has steadily expanded its vast quantitative easing programme, where it buys bonds with money that it creates electronically.

Rajan said the impact of these “unconventional” policies on trade and capital flows outside their individual countries should be overseen by multilateral bodies such as the IMF.

“This period of slow growth is particularly dangerous because both industrial countries and a number of emerging markets need high growth to quell rising domestic political tensions,” he said.

Rajan said a new international agreement similar to that set up at the historic Bretton Woods conference in 1944 may be necessary to establish the new system.

– Asia importance –

Earlier in the day IMF chief Christine Lagarde said structural reforms were needed in Asia, “the world’s most dynamic region” given its increasing importance to the global economy.

Asia already accounts for 40 percent of the world economy and stands to deliver nearly two-thirds of global growth over the next four years, Lagarde, the IMF managing director, told the Advancing Asia conference.

“Given this vital economic role, making the most of Asia’s dynamism is of great interest to the entire world,” Lagarde, on stage with Indian Prime Minister Narendra Modi, said.

“Increased interconnectedness means that Asia now affects the world more than ever before,” she said. “By the same token, Asia is now more deeply affected by global economic developments than ever before — and must respond to them.”

With the global economy facing challenges, it is key that Asian countries carry out structural reforms to boost competitiveness and jobs and ensure growth in the future, she said.

Lagarde cited examples including the need for China to rebalance its economy away from debt-led investment, the need for corporate governance reforms in Japan and for improvements in Indian infrastructure.

Strengthening the business environment and developing bond markets will be crucial across the region, she added.

Also speaking at the conference, Prime Minister Modi said that India has “dispelled the myth that democracy and rapid economic growth cannot go together”.

India’s government has projected economic growth of 7.6 percent for the financial year 2015-16, making it the world’s fastest-growing major economy.

“My agenda of ‘reform-to-transform’ still needs to be finished,” Modi said.

In January the IMF lowered its outlook for global economic growth this year, warning of substantial risks in major emerging market economies.

Slower Chinese growth, a stronger US dollar, collapsed oil prices and political turmoil could wreak further havoc in struggling economies like Russia and Brazil, putting the brakes on the global recovery, it said.

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