Need to be wary of spillover effects of narrower policies, says Sinha

Union Minister Jayant Sinha on Sunday came in support of Reserve Bank of India Governor Raghuram Rajan's call for a system to assess impact of unconventional monetary policies of some industrialised nations and said narrower policies by some nations can have spillover effects.

International Monetary Fund (IMF) chief Christine Lagarde, however, favoured the continuation of unconventional monetary policy in countries where inflation is very low.

Sinha said it was important that nations across the region pursue policies that are much more coordinated than they are right now.

“We have to be very watchful of spillover effects as countries are pursuing in some cases somewhat more narrower domestic policies which, of course, have spillover effects across region, across the world, that do require significant coordination,” he told reporters here.

He called for "very careful thinking" on more coordinated fiscal expansion.

Rajan had on Saturday called for a system for assessing the wider impact of monetary policies of global central banks, including unconventional tools and their spillover effect, and colour codes for rating them.

Rajan has been critical of moves by central banks to lower interest rates to meet domestic demands, ignoring the impact it would have on the global economy.

He said the unconventional monetary policy used by industrialised nations has a global impact and there was a need to discuss this.

Lagarde said the position of the IMF on unconventional monetary policy has been that they "should be continued in those countries where inflation is very low and where monetary policy is accompanied by other measures taken by policymakers in fiscal and structural reforms."

“We have stated very clearly that monetary policy is needed but cannot be the only game in town and cannot be over-burdened with the overall policy needs that countries have,” she said.

Lagarde and Sinha were jointly addressing a press conference at the conclusion of the three-day Advancing Asia Conference, co-hosted by India and IMF here.

Rajan's suggestion at the conference came days after the European Central Bank cut all its main interest rates, expanded asset purchases and launched a loan programme to pay banks to lend to firms and households. Bank of Japan too has taken interest rates into negative territory.