Unconventional monetary policy fine for nations with low inflation: Christine Lagarde

By: | Published: March 14, 2016 12:47 AM

The International Monetary Fund (IMF) chief Christine Lagarde on Sunday backed countries following unconventional monetary policies...

The International Monetary Fund (IMF) chief Christine Lagarde on Sunday backed countries following unconventional monetary policies if they were accompanied by structural reforms and low inflation, but acknowledged that these could pose downside risks to India.

Lagarde’s comments come a day after the Reserve Bank of India governor Raghuram Rajan called for global central banks adopting a system for assessing the wider impact of their actions, including unconventional monetary policies, and better coordination of policies.  “Governor Rajan always has interesting proposals and clearly the IMF itself is a good forum for any kind of coordination, consultations between the policy makers and players,” Lagarde said at the close of a three-day IMF conference here. “Unconventional monetary policy should be continued in those countries where inflation is very low and where monetary policy is accompanied by other measures taken by policy makers in fiscal and structural reforms,” she said.

Last week, the European Central Bank cut its main interest rate to zero and announced a 20 billion-euro monthly increase in quantitative easing that for the first time opened the door to purchases of corporate bonds. A new series of long-term loans to banks will begin in June.  While ECB is expanding its easy monetary policy, the US Federal Reserve has started tightening policy, both having implications for capital flows into emerging markets like India, besides potentially creating volatility in the global financial markets.

On February 25, the rupee plunged to a 30-month low of 68.72 against the US dollar on fresh demand for the American currency in view of persistent fall in domestic equity market amidst foreign capital outflows.


Backing the latest Budget of India presented to Parliament on February 29, Lagarde said the fiscal stance was very sensible and the right one under the given circumstances. She singled out investments being made into major infrastructure projects and said it was the right way to stimulate short-term growth as well as to improve medium to longer term productivity in the country. Finance minister Arun Jaitley stuck to fiscal discipline in the Budget 2016-17, lowering the deficit target to 3.5% of GDP for next fiscal from 3.9% in the current fiscal.

“They (downside risks to Indian economy) could result from asynchronous monetary policies and the spillover impact it could have. India is mindful of that and is very attentive to its fundamentals in order to be able to be able to resist that,” Lagarde said.

According to the latest IMF forecast released in January, India’s economy will likely grow 7.5% in the next fiscal, compared with 7.3% in 2015-16, helped by a plunge in oil prices and relatively low exposure to the global slowdown. In January, it projected global growth of 3.4% in 2016 and 3.6% in 2017, having revised downwards its October forecast for both years by 0.2 percentage point. However, IMF has cautioned that it might cut global growth forecasts further in the coming weeks if policymakers adopt urgently more comprehensive and concerted policy action to strengthen growth and manage financial vulnerabilities. The Fund has listed China’s slowing growth and highly stressed banks and corporate are a key concern.

On the spike in stressed assets of Indian banks, Lagarde said banking system of India seems to be well capitalised and efforts to reinforce and strengthen them was well taken. Indian banks’ stressed loans are at 13-year high of Rs 8 lakh crore up to December 2015.

Lagarde said India could contribute significantly to world GDP growth in the coming years and backed the new GDP series adopted by the country’s statisticians by saying “it is in line with international standards.”

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