Rajan didn't imply world economy was at risk: RBI

Last week, RBI governor had expressed concern at policies of major central banks

Blaming a section of media for 'mis-characterising' Reserve Bank of India (RBI) governor Raghuram Rajan's comments during a speech at the London School of Business on June 25, the central bank clarified on Sunday that Rajan did not imply there was an imminent risk of the world economy seeing something like the Great Depression.

"Governor Rajan did not imply or suggest that there was any risk of the world economy, which is in steady recovery notwithstanding uncertainties like those in the euro area, slipping into a new Great Depression," said a statement issued by RBI on Sunday.

The Great Depression is considered the longest, deepest, and most widespread depression of the 20th century. It began in most countries in 1929 and lasted until the late 1930s.

In his speech, Rajan had expressed concern about the policies followed by major central banks around the world, saying they were "in danger of slipping into the kind of beggar-thy-neighbour strategies that were followed in the 1930s". The goal of such a strategy is to increase the demand for exports, while reducing dependence on imports. The strategy is executed by devaluing a country's currency, which will lead to making exports to other nations cheaper.

The Great Depression was a period of great turmoil, caused by many factors.

In his speech, Rajan had also called for "new rules of the game" in the international monetary system, a call he had made before.

"Even as we create conditions for sustainable growth, we need new rules of the game, enforced impartially by multilateral organisations, to ensure countries adhere to international responsibilities," Rajan had said in his speech.

Rajan was among the few to have predicted the 2008 financial crisis. According to him, the problem was a "broader" one and for the entire world, not only for industrial countries or emerging markets. The former International Monetary Fund (IMF) chief economist, who had earlier warned against competitive monetary policy easing by central banks globally, said the situation was different in India on this front, adding that RBI was more focused on reducing lending rates to spur investment.

According to Rajan, the current non-system in international monetary policy is a source of substantial risk, both to sustainable growth and to the financial sector. "It is not an industrial country problem, nor an emerging market problem, it is a problem of collective action. We are being pushed towards competitive monetary easing and musical crises. I use Depression-era terminology because I fear that in a world with weak aggregate demand, we may be engaged in a risky competition for a greater share of it. We are thereby also creating financial sector risks for when unconventional policies end," he had said earlier, in his remarks to the Economic Club of New York in May.