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  3. Easy monetary policy could lead to more problems for an economy; Raghuram Rajan

Easy monetary policy could lead to more problems for an economy; Raghuram Rajan

11 Apr 2014 Evaluate

Just few days after first bi-monthly monetary policy statement for 2014-15, Reserve Bank of India (RBI)’s Governor Raghuram Rajan underscored that a very accommodative monetary policy could lead to more problems for an economy rather than help sustain growth.  This was perhaps a reason as to why Raghuram decided to maintain a status quo stance in its monetary policy review at a time when he could have cut rates on the back of 9 month low Wholesale Price Index (WPI) and 25 months low retail inflation data.

At Brookings Institution function in Washington, Raghuram also reiterated his call, first made at the G20 summit in Sydney in February, for more coordinated monetary policy actions between advanced and emerging economies to avoid the spillover effects. Further, former chief economist at the International Monetary Fund (IMF), terming multilateral institution’s policy coordination, unpopular among central bankers also criticized it for supporting such extremely loose monetary policies, by citing that official statements by multilateral institutions continue to endorse unconventional monetary policies, while downplaying the adverse spillover effects to other countries.

In reference to fed stimulus package, the governor averred that more transparent and well-communicated the exit is, the more certain the foreign investment managers may be of changed conditions, and their exit from risky positions.

He, however, pointed that by this he did not mean that central bankers should sit around a table and collectively deliberate policy or for that matter call each other regularly and coordinate actions, but strongly proposed that large country central banks, both in advanced countries and emerging markets, internalise more of the spillovers from their policies in their mandate, and should be forced by new conventions on the ‘rules of the game’ to avoid unconventional policies with large adverse spillovers and questionable domestic benefits.

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