India vs. the U.S.: When Central Bankers Collide

Governor of the Reserve Bank of India Raghuram Rajan in Mumbai on Jan. 30 Photograph by Dhiraj Singh/Bloomberg

Central banking isn’t a contact sport like football, or even cricket. But the head of India’s central bank, who until recently was living and working in the U.S., is throwing some sharp elbows at his counterparts at the Federal Reserve. This is as close to a brawl as you’re likely to see in the genteel world of official monetary policy.

In an appearance on Bloomberg TV India yesterday that made headlines around the world, Reserve Bank of India Governor Raghuram Rajan said “international monetary cooperation has broken down.” Lest there be any confusion about what caused the breakdown, Rajan said, “Industrial countries have to play a part in restoring that, and they can’t at this point wash their hands off and say, ‘We’ll do what we need to and you do the adjustment.’”

Rajan’s reference to “industrial countries” pertains mostly to the U.S., where the Federal Reserve announced yesterday that it would further taper its bond-buying. The Fed’s move puts upward pressure on U.S. interest rates. That in turn leads investors to snatch their money out of countries like India and put it in U.S. securities that suddenly offer more attractive yields. The result: downward pressure on India’s currency, the rupee. When the rupee falls, Indian imports get more expensive. That makes Indians poorer and raises the inflation rate, which is already running at around 10 percent a year.

Rajan elaborated on his argument today. “The U.S. should worry about the effects of its polices on the rest of the world,” he told a group of students in Mumbai in response to a question about how Indian policies affect other countries. “We would like to live in a world where countries take into account the effect of their policies on other countries and do what is right, broadly, rather than what is just right given the circumstances of that country.”

U.S. authorities reject the notion that they should base their interest-rate decisions in part on how they will affect other countries, as Bloomberg reports. “What we’re trying to do with our monetary policy here—as I think my colleagues in the emerging markets recognize—is trying to create a stronger U.S. economy,” Bernanke said in a Sept. 18 press conference. “And a stronger U.S. economy is one of the most important things that could happen to help the economies of emerging markets.”

The relationship between the U.S. and India has blown hot and cold over the decades, with India leading the movement of nonaligned nations and playing the U.S. and Soviet Union off against one another during the Cold War. But Rajan himself is hardly a fiery Third World activist. The 50-year-old is a former chief economist of the International Monetary Fund and has an endowed chair in finance at the University of Chicago’s Booth School of Business. Heeding the call of his homeland, Rajan became chief economic adviser to Prime Minister Manmohan Singh in 2012 and then, last September, took over as governor of the Reserve Bank of India. Though he’s on leave from Chicago Booth, he still has his chair there.

One of Rajan’s Chicago colleagues, Randall Kroszner, a former governor of the Fed, rejects Rajan’s criticism of the U.S. “Countries that are being hit tend to be ones that have high current-account deficits, high fiscal deficits, and relatively high inflation, and the challenge is brought on by their own domestic policies,” Kroszner told Bloomberg Radio. “It’s unfair to say it’s all the Fed’s fault.”

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