1. RBI Governor Raghuram Rajan warns against overburdening central banks to fix struggling economies

RBI Governor Raghuram Rajan warns against overburdening central banks to fix struggling economies

RBI Governor Raghuram Rajan said China is a big country and every adverse development has impacts.

By: | London | Updated: August 26, 2015 9:57 AM
Raghuram rajan

RBI Governor Raghuram Rajan said China is a big country and every adverse development has impacts. (PTI)

A day after a rout in Chinese stocks triggered the biggest ever carnage in Indian stocks markets, RBI Governor Raghuram Rajan on Tuesday said China is a big country and every adverse development has impacts, even as he warned against overburdening central banks to fix struggling economies.

“There is a lot of uncertainty about what the real numbers are…the numbers have to come out but China is a big country, has become very important to the global economy. Every adverse development across the world affects the rest of the world in some ways,” Rajan said about the China-led slowdown.

“It works through financial markets first, then trade later. So it’s something that everyone is concerned about. But you have to be careful about attributing everything to China,” he told BBC.

However, earlier in the day, Finance Minister Arun Jaitley in New Delhi asserted that the global market turmoil was not a cause of “worry” for India.

Asked about fears of another global economic crisis, Rajan said, “Based on what I have seen so far there is no strong reason to believe that we are on the verge of another crisis…but we have to be vigilant about some of those fragilities that have built up.”

Rajan also issued a warning against overburdening central banks to fix struggling economies.

In the interview for ‘India Business Report’ on BBC World News, the man in charge of India’s monetary policy warned that economic problems can be solved only through reforms and over intervention by central banks could lead to “more bad than good”.

“I have been a little concerned about the immense burden for action that is falling on central banks and I think it is quite legitimate for central banks to say at some point we can’t carry the burden ourselves in fact we may not have the tools to do everything that is asked of us,” Rajan said.

“Don’t keep asking us to do more because at some point we get into territory where the consequences may be more bad than good if we actually act,” he stressed.

Rajan acknowledged that his situation was not typical in the current climate because unlike most global economies India still has high inflation at close to 6 per cent. Interest rates are also high at 7.25 per cent despite having been cut three times this year to try and stimulate growth.

“In my country I’m faced with traditional central bank problems like inflation so we still have a handle to work with those. But in some other countries you are faced with problems which are maybe way beyond what the central bank is capable of addressing such as demographic change, deep changes in productivity — and those are probably best dealt with other tools,” Rajan said.

“But if the other tools aren’t being used or there’s a sense they’ll take too long to work and you’re working with the central bank only as the primary engine you may end up in situations that actually create more harm than good. Once interest rates are at zero it’s hard to crank up new tools,” Rajan said.

He asserted that “central banks have tried, they’ve tried very hard – negative interest rates, low for long, quantitative easing, we’ve done a whole bunch of things like that.”

“The question is – at what point do you, through additional measures, do more harm than good?” he said.

In reference to the ongoing turmoil in the Asian markets, Rajan dismissed fears of any full blown crisis.

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