 "Raghuram Rajan")
Under pressure back home to cut rates, Reserve Bank of India (RBI) Governor Raghuram Rajan on Friday said global economies witnessing sustainable growth need to raise rates although not in a “one go, big bang” manner and that market volatility concerns should not come in the way of central bank decisions.
While Rajan did not name the US or the Federal Reserve, his comments before a grouping of global central bankers and the international business community come against the backdrop of the widespread speculation about an imminent rate hike by the US central bank.
He also said the concerns about market volatility should not come in way of the decision of the central banks.
Back in India, Rajan is under intense pressure from the government and the industry to further lower the rates, although he has already announced three cuts of 25 basis points each so far in 2015. RBI's next monetary policy review is scheduled on September 29. However, two of his cuts so far this year have been outside the scheduled reviews.
“We risk, as central banks, being trapped in a prisoner’s dilemma: Nobody wants to be the first to leave this extremely accommodative situation.
“We prolong a period of extreme monetary accommodation, but without the volatility that eventually has to emerge,” Rajan said here at a meeting of B20 on the sidelines of the G20 Meeting of Finance Ministers and Central Bank Governors.
Rajan, who was scheduled to attend a session on global economy here along with other central bankers and finance ministers from G20 nations, said the economies returning to a sustainable growth path need to begin unwinding their unprecedented monetary policies, which they had resorted to after the financial crisis of 2007-08.
“It is time to plan exits from the extremely accommodative monetary policies we have, and the longer we persist more the economic cost.
“Economies that seem to be reaching takeoff stage should use the opportunity when volatility is relatively low, and actually start moving back to normalcy,” Rajan said without naming the US Federal Reserve.
“Concerns about the eventual normalisation of global monetary policies are already creating an overhang on economic growth, and depressing investment and business activity as investors chase returns and try to avoid risk.
“Interest-rate policies alone can’t help establish healthy economic growth in the world,” he added. Rajan said he is not suggesting a hike in rates globally “in one go or in one big bang” but market volatility shouldn't be a factor in deterring central banks in countries registering solid economic growth.
Referring to uncertainties about a rate hike in the US, he said return to monetary policy normalcy would address the concerns over volatility in the future. He also warned that the central banks globally might have engendered excessive fragility in the system.
Amid concerns in India and other global markets about uncertainty over a rate hike in the US, Rajan on Friday sought to play down fears saying markets should not be scared of volatility as it would be transient in nature.
He also said finance “is only a lubricant to growth” and it would be the overall economic policies of the countries that would determine their basic growth momentum.
Addressing the plenary session of the B20 meet, an informal grouping of business leaders from G20 countries, Rajan referred to issues facing the global economy and said the problems include people saving more and spending less, low productivity and low investments. But the solution is that “we should not be scared of volatility”, he said.
The B20 grouping engages with the G20 governments on behalf of the international business community and has organised its own meeting here on the sidelines of the G20 minister-level meetings.
The other panelists in the session on ‘Navigating through the global low growth and low interest rate environment' included IMF chief Christine Lagarde as also the central bank governors of France, Turkey and Mexico.
Lagarde said the G20 leaders need to respond to the calls for creating jobs.
On what was holding back the investments, the panelists named lower global growth prospects and structural confidence related aspects such as business environment.
Lagarde emphasised on three broad areas — efficient investment in infrastructure, financial reforms and labour and product market reforms.
The panelists observed that the global economy is recovering at a moderate pace since the end of the global financial crisis.
In order to support the recovery, monetary policy in the developed world has remained accommodative through lower policy rates and expanded central bank balance sheets, they said.
They felt that this has led to not only lower short-term interest rates but also lower long-term interest rates.
Despite recent prospects of policy normalisation in some advanced economies, interest rates are likely to stay low in the coming years as well, reflecting the downward revised growth potential and very low inflation rates especially in the developed economies.
This environment coupled with slowing productivity growth and low investment rates poses challenges for central banks across the world.
Extraordinarily low interest rates for an exceptionally long time, in nominal and inflation-adjusted terms, raises questions about its efficacy, its potential threats for financial stability and hence the need for an expanded set of policy tools.
