Need to avoid beggar-thy-neighbour policies: Raghuram Rajan
New Delhi - RBI Governor Raghuram Rajan has said there is need to avoid beggar-thy-neighbour policies and sustained exchange-rate intervention that primarily induce capital outflows and competitive currency devaluations.
"In an ideal world, the political imperative for growth would not outstrip an economy's potential. In the real world, where social-security commitments, over-indebtedness, and poverty will not disappear, we need ways to achieve
Incidentally, China on Thursday lowered the yuan's central rate against the US dollar by 0.51 per cent to 6.5646, the lowest since March 2011. A lower currency would make Chinese exports cheaper and more competitive in the global markets.
Indian capital markets joined the global sell-off sparked by China growth concerns. The rupee also fell to more than a three-week low of 66.93.
According to Rajan, multilateral institutions like the International Monetary Fund should exercise their responsibility for maintaining the stability of the global system by analysing and passing careful judgement on each unconventional monetary policy (including sustained exchange-rate intervention).
"The current non-system is pushing the world toward competitive monetary easing, to no one's ultimate benefit. Developing a consensus for free trade and responsible global citizenship - and thus resisting parochial pressures - would set the stage for the sustainable growth the world desperately
needs," he said.
Rajan said that developed countries have just one other channel for growth-- boosting exports by depreciating the exchange rate through aggressive monetary policy.
"Ideally, emerging-market countries, funded by the developed economies, would absorb these exports while investing for their future, thereby bolstering global aggregate demand," he said.
He said that "these countries' lesson" from the emerging-market crises of the 1990s was that reliance on foreign capital to fund the imports needed for investment is dangerous.
In response, several of them cut investment in the late 1990s and began running current-account surpluses, preferring to accumulate foreign-exchange reserves to preserve their exchange-rate competitiveness, the RBI Governor added.
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Jagdishan, a chartered accountant by profession, is a science graduate and has a Master's degree in Economics of Money, Banking and Finance. He has over 29 years of experience in the banking industry
RBI had last revised its policy rate on May 22, in an off-policy cycle to perk up demand by cutting interest rate to historic low.