US Fed critic Rajan is all praise for Yellen

Reserve Bank of India Governor Raghuram Rajan has been a critic of the US Federal Reserve, notably after it pulled out its bond-buying programme under quantitative easing.

Nonetheless, he feels, current Chair Janet Yellen deserves praise for being sympathetic to emerging markets.

"They (US Fed) certainly are paying more attention and talking about paying more attention (to emerging markets), which I think is a very welcome step," Rajan said in an interview to The Wall Street Journal.

"I think that's changed quite a bit under Yellen."

Earlier, when Ben Bernanke was the Fed chair, Rajan was often critical of the policies that drove waves of capital into and out of emerging economies -- many of whom were often unable to deal with its impact on factors such as developmental investments and inflation.

The governor is here for the spring meetings of the World Bank and the International Monetary Fund (IMF) as part of the Indian delegation led by Finance Minister Arun Jaitley, which also includes Chief Economic Adviser Arvind Subramanian.

The Indian central bank governor also said the shift in US Fed's thinking will give other economies breathing room to address their problems -- like sinking commodity prices hurting commodity-exporting countries and high US dollar debt loads affecting companies in some emerging markets.

"Are other countries capable of using the time well, or are the problems beyond their actions?" Rajan, who was the chief economist at the IMF from 2003 to 2007, queried during the interview.

But citing India's example, he said, both the current account deficit, as also the fiscal deficit, had been narrowed giving the economy more flexibility to manage the turbulence.

As regards to more rate cuts, he said, much depended on inflation and monsoon rains.

"We're looking at inflation. If it continues on a downward path, that would create room. We're looking for signs of a good monsoon. Unfortunately, India is still somewhat sensitive to monsoons, though people find it hard to see a link between monsoons and food prices," he concluded.

Asked how does he rate the threat from China these days, Rajan said: "Well, I go with the emerging consenus, because I don't fancy myself as a China expert. But it seems as if the short-term threat has been averted through a stimulus-a variety of stimulus actions, both on the monetary and the "fiscal side".

Clarifying whether central bankers are too wedded to the idea of stabilizing inflation around a target, Rajan said: "I am saying conditions that we operate under today are different from the conditions when the inflation targets were set. And the question we have to ask is, if we have tried a whole bunch of things-normal monetary policy, zero interest rates, negative interest rates and quantitative easing -and we still are faced with a somewhat deflationary environment across the world, should one continue to see there are still many tools up our sleeve, including the nuclear option?"

"Or should one admit that policy actions by central banks have significantly lower effects now than they had earlier? And perhaps it's time for others to step up," he added.