Rajan hopes for better co-operation among central bankers

Reserve Bank Governor Raghuram Rajan today expressed the hope central bankers of large economies will start extending better co-operation, a view shared by IMF chief Christine Lagarde.

His comments assume significance as it comes ahead of the US Fed meeting, which is expected to signal a cycle of rate tightening. It is widely feared that once the US begins rate hike cycle there will be huge capital outflows from emerging markets like India, resulting in wide volatility in markets currency movements.

"You might want anticipation (of monetary policy changes), the anticipation is very difficult when the issue seems far off and already central bankers have done a lot which is raising political concerns within their countries.

"Therefore, it may take actual volatility in markets to bring forth more co-operation," Rajan said, adding he hopes co-operation will emerge.

Chairing a session addressed by the visiting IMF chief at the RBI headquarters here this evening, Rajan said one of the concerns that central bankers across the world have is that they have done too much and global cooperation requires yet more actions.

Rajan had last year said in Sydney that the leaders of the large economies should not look only at their own interests while taking monetary policy actions as their every action had larger implications on the emerging markets.

Emerging markets have been recipients of large fund inflows as a result of developed world's lose money policy.

According to IMF, such fund flows to the emerging world touched a whopping USD 4.5 trillion between 2009 and 2012, representing roughly one half of global capital flows. India alone had received a full USD 470 billion in foreign inflows.

But these economies went into a turmoil when the US Fed in May 2013 had hinted that they would begin tapering. One of the worst hit countries was India, when funds sold close to USD 19 billion in equities and debt since may and December of that year.

Answering a question Rajan said the appetite for global co-operation is smaller than one might wish, but it may emerge very strongly, conditional to the events happening.

During the Q&A, International Monetary Fund Managing Director Christine Lagarde also called for better and more frequent communication among central bankers across the world, so that the monetary action of a particular country can be anticipated by others also.

"As we are getting closer to the point of significant inflexion, they can and there should be more so that communication is well done, cooperation is solid and frequent, so that there can be good anticipation and preparation by those who will be suffering or at least receiving the spillover effect," Lagarde said.

According to Lagarde the second risk is low-low, high-high. "Low inflation, low growth, high unemployment, high indebtedness, which affects predominately the Eurozone area and few other countries," she elaborated.

She said geo-political risk is the third one which could have economic consequences and can create massive uncertainty, dampens risk appetite to expand and increase trades.

On another query from Rajan on the unconventional monetary policy, Lagarde said such policies are temporary in nature and are not suppose to last forever.

Lagarde said also called for greater co-ordination between central bankers because "the timing of the interest rate lift-off and the pace of subsequent rate increases can still surprise markets".

Addressing a gathering at the Reserve Bank here, she asked central bankers in the West to give a clearer, effective communication of their policy intentions to the emerging world to help them contain market volatility.

"I am afraid this ("taper tantrum of May and June of 2013") may not be a one-off episode. This is so, because the timing of the interest rate lift-off and the pace of subsequent rate increases can still surprise markets," she said.

The IMF Managing Director said she sees scope for the greater international policy cooperation to minimise the negative spillovers.

Supporting Rajan's previous calls for greater co-ordination between central bankers of the emerged market and the emerging market, she said: "Clear and effective communication of policy intentions can reduce the risk of creating very large market volatility.

"Though admittedly it is a difficult task, there is scope for greater international policy cooperation to minimise the negative spillovers."

The IMF chief was giving a speech on 'Spillovers From Unconventional Monetary Policy: Lessons for Emerging Markets' at the RBI headquarters here.

Admitting that the easy money policy of the West since the 2007-08 credit crisis has helped the emerging world, the IMF chief  said such policies also led to a build-up of risks in this part of the world.

It may be noted since the tapering talk began in mid-May 2013 by the then US Fed chief Ben Bernanke, the rupee went on free fall as FIIs pulled out nearly USD 19 billion from the country.

As the crisis persisted, the rupee touched a historic low of 68.85 to the dollar on August 30 2013. After Rajan took over in September there was a massive stability in the rupee and last year it was the best performing Asian currency.