Raghuram Rajan warns bankers against competitive monetary easing

Colombo: Close on the heels of his biggest ever rate cut in India, RBI Governor Raghuram Rajan Monday warned central bankers across the world against competitive monetary easing and pitched for a collective action.

Rajan also pitched for free trade, open markets and well-capitalised multilateral institutions to overcome the global economic slowdown which could lead to high political tensions.

Speaking at a function to mark the 65th anniversary of Sri Lanka's Central Bank here today, the RBI Governor said, "The current 'non-system' in international monetary policy is, in my view, a source of substantial risk, both to sustainable growth as well as to the financial sector.

"It is not an industrial country problem, nor an emerging market problem, it is a problem of collective action. We are being pushed towards competitive monetary easing and musical crises."

Last week, Rajan sprang a surprise by effecting a more-than-expected interest rate cut of half a per cent to boost the economy. The reduction came on the back on RBI cutting interest rates thrice earlier this year by 25 basis points each.

Rajan said that the current economic woes of the world were affecting all nations and urgent action was needed.

He warned that weak aggregate demand across the world may be leading nations to engage in a "risky competition for a greater share of it".

"We are thereby also creating financial sector risks for when unconventional policies end. We need stronger well-capitalized multilateral institutions with widespread legitimacy, some of which can provide patient capital and others that can monitor new rules of the game.

"And each one of us has to work hard in our own countries to develop a consensus for free trade, open markets, and responsible global citizenry. If we can achieve all this even as recent economic events make us more parochial and inward-looking, we will truly have set the stage for the strong sustainable growth we all desperately need."

He said there are few areas of robust growth around the world, but the present period of slow growth is particularly dangerous as both industrial countries and emerging markets need high growth to manage domestic political tensions.

"In an environment of such tensions, there is a tremendous pressure for growth in different countries and such countries are more likely to focus on the policies attempting to divert growth from others rather than creating new growth."