1. Paul Krugman is right. Raghuram Rajan’s warning on low interest rates is not new!

Paul Krugman is right. Raghuram Rajan’s warning on low interest rates is not new!

Raghuram Rajan, the former RBI governor who demitted the office on September 4, has warned that low interest rates across the world can distort global markets.

By: | New Dehi | Published: September 6, 2016 1:19 PM
Raghuram Rajan, Paul Krugman, Paul Krugman news, rajan, Raghuram Rajan news, Raghuram Rajan rbi In 2010 too, Rajan had said that central banks should consider raising rates. Rajan had asked the then US Federal Reserve Chairman Ben Bernanke, to increase benchmark rate by as much as 2 percentage points. (Reuters)

Raghuram Rajan, the former RBI governor who demitted the office on September 4, has warned that low interest rates across the world can distort global markets. In an interview with The New York Times, Rajan said that countries around the world are caught in a cycle of low interest rates, and are skeptical of raising them for fear of slowing down economic growth. In what NYT called a “new warning”, Rajan cautioned that low interest rates cannot be treated as a substitute for other monetary policy instruments.

However, as Nobel Laureate Paul Krugman was quick to point out, this is not the first time that Raghuram Rajan has spoken of the ills of lower interest rates. “This is not a new warning from Rajan — he’s been saying this sort of thing for years,” Krugman tweeted. Indeed just earlier this year Rajan had said that low rates actually lead to people saving more rather than spending. “Lower the interest rate, the more is the saving… People aren’t going out celebrating when interest rates get cut. Rather people are actually saving more because they need pension, they worry about viability of government fund pensions,” he had said.

In 2010 too, Rajan had said that central banks should consider raising rates. Rajan had asked the then US Federal Reserve Chairman Ben Bernanke, to increase benchmark rate by as much as 2 percentage points. He had warned that near zero interest rates risk fanning asset bubbles or may even lead to inefficient companies being encouraged. Under different scenarios, Rajan has time and again flagged the risk of keeping interest rates low for too long. “You could have perverse effects of very low interest rates and perverse effects of substantial fiscal stimulus. These things eventually run out of steam,” he said earlier this year.

Rajan was the economist who had correctly predicted the 2008 financial crisis. As the RBI governor, Rajan often invited criticism from industry for not lowering interest rates. In his last speech as the RBI governor, Rajan stressed the importance of the independence of the central bank. “The Reserve Bank cannot just exist, its ability to say “No!” has to be protected. At the same time, the central bank cannot become free of all constraints, it has to work under a framework set by the government,” he had said.

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