Raghuram Rajan warns of 'policy uncertainty' for world economy

We have a bunch of new leaders who need to prove themselves that they are strong, he said

Former Reserve Bank of India (RBI) governor Raghuram Rajan on Thursday warned of "policy uncertainty" for the world economy due to there being a "bunch of new leaders" who need to prove they are strong, even as he exuded confidence about all large economies doing well.

Without specifically mentioning India, Rajan said, "This is the first time in a long while we have seen all the big engines firing at the same time including the large emerging markets ... We have seen trade picking up."

"We are seeing early signs of investment intentions. Of course there are always clouds. There are clouds this time also," he said.

In an interview to CNBC, the Chicago Booth School professor and the outspoken economist also said the "good news is some of the fears about the (Trump) administration that it would move immediately to a more protectionist stance haven't played out".

"There have been noises but of course the strong action that some people feared against Mexico, against China hasn't really materialised. That's the good news," he said while referring to Donald Trump administration in the US.

Talking about the possible risks before the world economy, Rajan who served as RBI governor for three years, said, "There is lot of policy uncertainty right now because of the work the (US) administration is going to do and how much it can achieve.

"But also there is geo-political risk. We have a bunch of strong leaders around the world who are already well entrenched in their strength," he added. 

"We have a bunch of new leaders who need to prove themselves that they are strong. And in that kind of environment, who has room to back off if in fact there is a confrontation. We have many areas of confrontation," he said. 

Rajan further said as the US monetary policy normalises, "we will see more stress" on heavily indebted entities.