IMF sees emerging market innovations as 'crankiness', says RBI Governor

In a veiled criticism of the International Monetary Fund (IMF) getting influenced by monetary policies of the developed world, Reserve Bank of India (RBI) Governor Raghuram Rajan has said the policy innovations from emerging markets are more likely to be seen by it as “crankiness of the governor or the government”.

Rajan, who himself has served in the past as IMF chief economist, said the multilateral institution is more likely to find innovations in developed market economies as “appropriate”.

Asked whether monetary policies of developing and emerging markets like India come under greater scrutiny by IMF, than do the advanced economies like the US, he said, “I don't think it is a practice that these are scrutinised more than others.”

“What I would say is that the Fund is probably more influenced by innovations in industrial country policies and is more likely to believe those innovations are appropriate, while innovations from emerging markets are more attributed to the crankiness of the governor or the government rather than based on a well thought-out policy given the political and the economic environment. So there is a greater willingness to believe this is the right policy under the circumstances, and less willingness to believe that circumstances justify the policy as well,” Rajan said in a podcast uploaded on the website of the IMF.

In the podcast, which was recorded when Rajan was in the US to participate in the IMF-World Bank Spring Meetings, he spoke about the Global Financial Safety Net.

"Rajan is charged with securing monetary stability in one of the world's largest Emerging Market economies, at a time when others are stumbling in the face of difficult global economic trends," the IMF said.

In the past also, Rajan has been critical of the IMF on various issues, especially about its neglect of the accommodative monetary policies adopted by the developed world since the 2008 global credit crisis.

In the podcast, Rajan also spoke about the impact on capital flows because of changes in both domestic and external environment, and said adequate forex reserve is a very good defence against such happenings.

"If people know you have enough reserves, you have enough to protect your currency, the exit becomes more orderly and sometimes it doesn't happen," he said.

He acknowledged that there is a different stream of thought, advocated by the multilateral institutions, which asks for greater flexibility on exchange rates.

Asked about the biggest gap in global financial stability, Rajan said availability of liquidity is the key concern.

On financial inclusion, Rajan said it is crucial for financial stability and its lack will lead to political problems.

"Political opposition to that economy will rise if you don't have across-the-board opportunity. Financial inclusion is one way of spreading that opportunity," he said, adding technology helps a lot in this aspect.