Reserve Bank today reiterated its call for greater coordination among leading central banks while formulating policies and also urged emerging market economies to strengthen their domestic policy response to weather any eventuality arising from the US taper.
"While international monetary policy coordination where advanced economies' central banks prepare the markets and allow gradual adjustments remains the first best policy choice, the emerging economies' domestic policy responses will need to gear up to convince markets on stable inflation, smooth exchange rate adjustments and effective micro and macro prudential policies," the RBI said in its annual report.
Governor Raghuram Rajan had many times in the recent past had called for such coordinations pointing out that the current 'non-system' in international monetary policy as a source of substantial risks, and argued for more consideration by source countries to the effect that their policies will have on other countries.
"The adverse effect of such a feedback loop might be minimised by greater coordination among systemically important central banks, multi-lateral arrangements for liquidity provision, better micro-prudential measures, or independent assessors who could analyse such policies and come to a judgement on whether they follow the rule of the game," the RBI said.
It said these measures could minimise the snowballing of adverse feedback spillovers of quantitative easing withdrawals taking the locus towards a globally optimal monetary policy framework.
The report said RBI research work suggests a clear relationship between the US volatility index (Vix) and the volatility in various financial markets in emerging markets, including India. US Vix is a widely tracked measure of volatility in the US equity markets.
