‘RBI governor didn’t mention risk of Great Depression’

Mumbai, June 29 (IANS) Clarifying on Reserve Bank of India Governor Raghuram Rajan’s recent remarks, the RBI has said a section of the media “mis-characterised” the governor as saying that the world is at risk of a Great Depression.

“What Governor Rajan did say, in his remarks made off the attached written text, was that the policies followed by major central banks around the world were in danger of slipping into the kind of beggar-thy-neighbour strategies that were followed in the 1930s,” the RBI said in a statement late on Sunday.

“The Great Depression was a period of great turmoil, caused by many factors and not just beggar-thy-neighbour policies. Governor Rajan did not imply or suggest that there was any risk of the world economy, which is in steady recovery notwithstanding uncertainties like those in the Euro area, slipping into a new Great Depression,” the statement added.

Speaking at the London Business School last week, Rajan said the policies adopted by major central banks worldwide were in danger of slipping into the kind of beggar-thy-neighbour strategies that were followed in the 1930s, and asked them to define “new rules of the game”.

“I do worry that we are slowly slipping into the kind of problems that we had in the thirties in attempts to activate growth,” Rajan said.

“We need rules of the game in order to effect a better solution. I think it is time to start debating what should the global rules of the game be on what is allowed in terms of central bank action,” he added.

Rajan, who had predicted the 2008 US financial collapse, has been warning that global markets are now at the risk of a crash due to the competitive loose monetary policies being adopted by developed economies.

When he took charge at the RBI in 2013, at a time the US Federal Reserve declared its intent to wind down its stimulus programme, the rupee plunged in value in respect of the US dollar on fears about a spiralling current account deficit.

In a series of measures, Rajan managed to stabilize the currency that also brought back investors.

“Rajan’s disciplined and focussed approach in leading the Reserve Bank during his first year as governor was remarkably impressive,” British magazine Central Banking said earlier this year, giving Rajan its Central Banker of the Year Award for 2015.

In 2011, he published the acclaimed “Fault Lines” on how hidden financial fractures threaten the world economy.

Pointing to the very low interest rate policies of the US Federal Reserve, the Bank of Japan and the Bank of England in a bid to stimulate their economies, Rajan has been warning that emerging markets are especially vulnerable to big shifts in capital flows triggered by the unprecedented monetary accommodation in rich countries.

Elaborating on the RBI’s policy stance at the time it left interest rates unchanged during its bi-monthly monetary policy review in February, Deputy Governor Urjit Patel described the “important backdrop” to the central bank’s move.

“We are in the midst of the age of competitive depreciation and of a beggar-my-neighbour philosophy. It brings to mind an old African saying that when elephants fight the grass suffers,” Patel had said.

“While the ECB (European Central Bank) and the Bank of Japan are printing money and devaluing their currencies on one hand, the US economy is reviving on the other. Anyone in the middle is getting crushed,” he added.

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