Reserve Bank of India Governor Raghuram Rajan warned that unconventional monetary policies pose a “substantial risk” to sustainable global growth.
“It is not an industrial country problem, nor an emerging market problem, it is a problem of collective action,” he said in a speech in New York on Tuesday. “We are being pushed towards competitive monetary easing.”
Rajan, a former International Monetary Fund chief economist, has been one of the most vocal critics of unprecedented monetary stimulus policies deployed by developed economies. He’s questioned their success and deplored the lack of coordination with developing counterparts.
The tactics being deployed by some countries to boost growth also create risks in the financial industry, once the era of unconventional monetary policies ends, Rajan said.
Central banks in the U.S., Europe and Japan have tried to spur growth by holding interest rates near zero for years, and through massive asset purchases aimed at holding down longer-term borrowing costs.
“I fear that in a world with weak aggregate demand, we may be engaged in a risky competition for a greater share of it,” Rajan said in remarks to the Economic Club of New York.
While some unconventional policies are justified to help mend markets that are “broken or grossly dysfunctional,” the benefits becomes fuzzy when policies are prolonged, he said.
Citing spillovers, such as capital flows into emerging markets, Rajan called for institutions such as the International Monetary Fund to help develop a consensus around central bank policies that don’t ignore international responsibilities.
“We need much clearer rules of the game on what’s allowed and what’s not allowed,” he said.
The rupee was among currencies that plunged to a record low when the U.S. Federal Reserve first signaled it might scale back bond buying in mid-2013.
Rajan, who took over shortly after the so-called taper tantrum, has built up record foreign-currency reserves of $327 billion to help defend the rupee when the Fed starts raising interest rates for the first time since 2006.
Answering questions about the Indian currency, Rajan said that while the rupee’s recent weakness against the dollar has garnered a lot of domestic media attention, it has been relatively stable since the start of the year.
“You have to argue that the rupee is one of the more stable currencies, at least against the dollar,” he said in response to an audience question. “It’s been much stronger against other currencies.”
Asked about the health of the Indian banking sector, he said Indian banks were “willing to lend,” though “going forward they will need more capital.”
Rajan welcomed recent government steps to foster investment in India and curb subsidies, including on gasoline.
India’s central bank chief has cut interest rates twice this year to boost growth in Asia’s third-largest economy as inflation slowed below his target level of 6 percent by next January. The next rate decision is scheduled for June 2.
“Inflation has come down tremendously,” Rajan said in response to a question from the audience.
Along with cooling inflation, India’s current-account deficit has shrunk, helped by a slump in oil prices. Growth is on track to surpass China’s, according to the IMF.