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Raghuram Rajan reiterates call for global monetary coordination

LiveMint logoLiveMint 28-05-2014 Dinesh Unnikrishnan

Mumbai: Reserve Bank of India (RBI) governor Raghuram Rajan on Wednesday once again pitched for stronger co-ordination among central banks of large economies to ensure that policy actions of one do not cause spill-over effects in other economies.

“The key rationale for co-ordination and international monitoring is adverse policy spill-overs,” Rajan said. He was speaking at the 2014 BOJ-IMES Conference on Monetary Policy in a Post-Financial Crisis Era’, organized by the Institute of Monetary and Economic Studies, Bank of Japan, in Tokyo.

Rajan, a former chief economist with the International Monetary Fund, warned that the current “non-system” in international monetary policy could be a source of substantial risk to sustainable growth and to the financial sector.

“The international rules of the game need to be revisited as the world has changed,” Rajan said, adding that both advanced economies and emerging economies need to adapt.

Rajan has been drawing attention to the possible spill-over effects of unconventional monetary policies used in developed countries in the aftermath of the global financial crisis, and the process of exit from such policies.

The RBI governor has in the past called for greater global coordination in monetary policy to avoid the impact of measures like the US quantitative easing (QE) that led to a gush of dollars into emerging markets, and resulted in an exodus of foreign funds from the same markets when the Federal Reserve in mid-2013 spoke about a “tapering” of its stimulus programme.

The Fed in December started the withdrawal of QE, cutting monthly bond purchases by $10 billion that month.

In April, speaking at a conference organised by the Brookings Institution in Washington, Rajan said developed market central banks must “reinterpret their domestic mandate to take into account other country reactions over time, and thus become more sensitive to spill-overs.”

The Indian central bank is set to review its monetary policy next Tuesday.

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