Forecasting a great global depression similar to that of the 1930s, Raghuram Rajan, the Governor of the Reserve Bank of India, has urged the central banks from across the world to define a “new set of rules for the game”. Saying that the situation is different in India, where the RBI still needs to bring down lending rates to spur investments, Rajan has been constantly warning the world against the competitive monetary policies being eased by the central banks.
Addressing a conference at London Business School on ‘Central Banker Perspective’, Raghuram Rajan expressed concern that the world may be slipping to the kind of problems of depression of the 1930s and an international consensus was needed to be built over time.
“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. I am not going to venture a guess as to how we establish new rules of the game. It has to be international discussion, international consensus built over time after much research and action,” he said.
Facing the questions regarding interest rate cuts-off from an Indian perspective, Rajan said that he tries to shut off market reactions. “So I shut out the asset price (hike) reaction and think more about, is this going to bring bank lending rates down and therefore channel cheaper credit into firms and then they will invest. However, the issue gets much more complicated for other markets,” said the RBI Governor. He laid emphasis on enormous pressure for growth, which leads to pressure on central banks, to take action. Noting the crisis ahead as not just a problem for industrial countries and emerging markets, he called it a broader game.
“The question is, are we now moving into the territory in trying to produce growth out of nowhere, we are in fact shifting growth from each other, rather than creating growth. Of course, there is past history of this during the Great Depression when we got into competitive devaluation,” he warned.
Highlighting the considerable efforts made by central banks during and after the economic crisis of 1930, he seeks a better solution, from their part itself, to overcome the new consequential trouble.