At a time when world economies appear to be struggling back to their feet following the global financial crisis, the Reserve Bank of India's (RBI) governor, Raghuram Rajan, has urged greater co-ordination among central banks to promote stable and sustainable growth.
The governor also questioned the extreme monetary easing adopted by some developed countries, with repercussions on emerging economies across the globe.
He was critical of the current international monetary policy framework. "The current non-system in international monetary policy is, in my view, a source of substantial risk, both to sustainable growth as well as 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," Rajan said in his speech at the Brookings Institution in USA.
"...my call is for more coordination in monetary policy because I think it would be an immense improvement over the current international non-system," he added.
Rajan said extreme monetary easing was probably not the medicine to revive growth. "A first step to prescribing the right medicine is to recognise the cause of the sickness. Extreme monetary easing, in my view, is more cause than medicine. The sooner we recognise that, the more sustainable world growth we will have," he said.
The governor said central bankers were usually reluctant to air their concerns in public. "But because the needed change has political elements to it, I take my cue from speeches by two central bankers whom I respect greatly, Ben Bernanke in his 2005 'Global Savings Glut' speech, and Jaime Caruana in his 2012 speech at Jackson Hole, both of whom have raised similar concerns to mine, although from different perspectives," Rajan said.
He said India's large capital inflows in recent months had ensured s substantial cushion to withstand global shocks. "India is seen by the markets as an emerging economy that has made some of the necessary policy adjustments. We are well buffered with substantial reserves, though no country can be decoupled from the international system," he said.
Rajan also proposed creation of global safety nets to mitigate the need for countries to self-insure through reserve buffers. "Another way to prevent a repeat of substantial reserve accumulation is to build stronger international safety nets. As the financial crisis suggested, this is not just an emerging economy concern. In a world where international liquidity can dry up quickly, the world needs bilateral, regional and multilateral arrangements for liquidity. Multilateral arrangements are tried and tested, and are available more widely, and without some of the possible political pressures that could arise from bilateral and regional arrangements," he said.