Monday, 24 February 2014

Be sensitive to emerging market climate: Rajan to Fed & Co

Central banks, including the US Fed, need to recognize the spillover effects of their monetary policies while shaping them , RBI Governor Raghuram Rajan said in an exclusive interview to CNBC. He added that the central banks could do well to be a bit more sensitive to the situation in emerging markets while making forward guidance. “Over the last few years, the extremely easy money policy have led to a build-up of capital flows into emerging markets and a lot more leverage than emerging markets have typically been used to,” Rajan told CNBC. Acclaimed for his forecast of the sub-prime crisis that rocked global financial markets in 2007-08, the erstwhile chief economist of the IMF is now beginning to be seen as something of a voice of emerging economies in general. “There is lot of forward guidance that central banks give…some sensitivity to what happens if the international situation changes would be useful,” Rajan said. The Fed’s remarks on tapering of its monetary stimulus have triggered periodic bouts of volatility in emerging markets, India included, since May last year when the word ‘taper’ was used. On the fiscal policy direction post elections, Rajan said that irrespective of which government came to power, the broader policies were likely to remain the same as they are at present. “If there is a stable coalition in power post election, no matter which permutation it is, broad policies will continue. There maybe a difference in details, but they are all for passing the goods and services tax, they are all for a number of actions which the current government is taking,” Rajan said. On the issue of inflation, which both the government and RBI continue to grapple with, Rajan said setting a target was the responsibility of the government. “What kind of inflation target to have should be some thing set by the elected representatives of the people and should not be something that the central bank decides on its own. We have certainly stayed away from setting our own inflation targets, that’s a process of discussion which the Finance Minister and the RBI governor as well as the Parliament might have going forward. There is no disagreement about the broader need to get a framework in place,” Rajan said. On the issue of non-performing loans, Rajan said though much of the problem was at state-owned banks, solvency was not an issue because of the government's backing. He said that many projects which were stuck right now were viable once the economic environment improved. “These are power projects which need coal and now the coal has been delivered or is being delivered, they can start producing. So I think a fair amount of it could turn around as growth picks up as projects get finished and to that extent the problem is contained,” Rajan said.

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