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Ignoring Raghuram Rajan's 2005 prediction was a big mistake: IMF chief

PTI | Last Updated: Wednesday, March 18, 2015 - 11:38

Showering fulsome praise on Raghuram Rajan, IMF chief Christine Lagarde Tuesday said not listening to his prediction of 2008 credit crisis was a big mistake of the multilateral funding agency.

Rajan, now the Reserve Bank Governor, was the Chief Economist and Research Director at the IMF during 2003-2006. He is credited with correctly forecasting in 2005 an impending global financial crisis at the annual meeting of prominent economists and bankers at Jackson Hole, US.

"The period when nobody was really forecasting the prices that what he did...Thing that was one of his many-many accomplishments. One of the many drawbacks of the Fund was not listen to him enough at that time.

"But, we do now pay attention to anything that 'Raghu' says," Lagarde said at an event organised by the Reserve Bank, which the Governor chaired this evening.

Lagarde said India's monetary policy "rests in good hands" and Rajan was taking several encouraging steps including allowing a greater role for private sector banks.

She praised Rajan for "deftly" steering the Indian economy after the US Fed hinted at withdrawing its easy money policy in May 2013.

"Raghu certainly has been very busy since he took over as the RBI Governor in September 2013. He has deftly steered the Indian economy to safer waters after it was hit by the market turmoil following the 'taper tantrum' episode of mid- 2013," she told a gathering of economists and bankers.

Lagarde, who is here for a two-day visit, welcomed Rajan's recent step to introduce flexible inflation targeting as the new regime for conducting monetary policy.

Rajan's 2005 comments got him few friends and appreciation but lots of opprobrium and ridicule.
His Jackson Hole prediction came when the US investor community was revelling in the high growth and stable financial conditions then prevalent around the world.

He had argued that the rising complexities of the markets, which spawned more and more complicated instruments like credit-default swaps and mortgage-backed securities, had in fact made the global financial system a much riskier place, not less so as many believed.

Such statements were not taken seriously then. But just three years later, his comments proved right as the worst financial collapse since the Great Depression of the 1930s hit the world economy by September 2008.

While delivering a lecture at RBI here, Lagarde said Rajan was "one of the world's most highly regarded financial economists, one whom the Fund is fortunate enough to have had as its Economic Counsellor".

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Stating that "India's monetary policy rests in good hands", Lagarde said the world was perhaps approaching the point where, for the first time since 2006, the US will raise interest rates later this year, as the first country to start the process of normalising its monetary policy.

She said that RBI took "decisive action during and after" the earlier 'taper tantrum' episode and it provided foreign currency liquidity support to key sectors, allowed the rupee to depreciate, and provided judicious foreign exchange interventions to minimize disruptive movements in the rupee.

"The RBI also arrested the surge in gold imports, narrowed its current account deficits sharply, and started to rebuild foreign exchange reserves," Lagarde said, adding that India successfully contained its domestic and external vulnerabilities more than in many other emerging economies.

Further talking about the Indian central bank, Lagarde said, "The RBI has taken several encouraging steps.

"By allowing for a greater role for the private sector in India's public sector banks, there will undoubtedly be a striking increase in efficiency in the banking sector."

"India's record in promoting good practices has been positive in recent times. It is making progress toward addressing bad loans in public sector banks, and in developing a sound regulatory and supervisory regime for banks, insurance, and securities market.

"Best international practices are also being adopted. For example, India is well ahead of many countries in implementing Basel III standards. The government's recent announcement to introduce legislation on a new Indian Financial Code, which will simplify and revamp India's financial regulatory architecture, is a revolutionary step."

"The world is looking to India to lead the path to higher, sustainable, and inclusive growth."

Separately, IMF quoted Lagarde as saying in a statement that "India is a bright spot in the world economy and is increasingly helping to drive global growth".

"Helped by positive policy actions that have improved confidence, and by lower global oil prices, India is set to revitalise investment and accelerate the pace of structural reforms," she said.

Lagarde said she also "had an interesting exchange of perspectives with women leaders in the financial sector and other senior representatives from civil society, including on issues such as India's entrepreneurial spirit, reform implementation, and efforts to sustain the country's high growth potential and improve its productivity".

"My dialogue with Indian leaders has convinced me that the conditions are ripe for India to be a key engine of global growth. My message here was that this is India's moment - it should seize this moment to build a bright economic future of rapid, inclusive, and sustainable economic growth and macroeconomic stability for many years to come," she said.

First Published: Wednesday, March 18, 2015 - 11:08

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