RBI chief Rajan again calls for coordination among top central banks

The Reserve Bank of India (RBI) on Thursday once again called for greater coordination among central banks of leading economies in formulating policies; and also urged emerging economies to strengthen their domestic policy to weather the tapering-off of financial incentives.

"While international monetary policy coordination where advanced economies' central banks prepare the markets and allow gradual adjustments remains the first best policy choice, the emerging economies' domestic policy responses will need to gear up to convince markets on stable inflation, smooth exchange rate adjustments and effective micro and macro prudential policies," the RBI said in its annual report.

RBI Governor Raghuram Rajan has often called for such coordination, pointing out that the current ''non-system'' in international monetary policy poses great threats, and argued for more consideration by 'source countries' to the effect their policies will have on other countries.

"The adverse effect of such a feedback loop might be minimised by greater coordination among systemically important central banks, multi-lateral arrangements for liquidity provision, better micro-prudential measures, or independent assessors who could analyse such policies and come to a judgement on whether they follow the rule of the game," the RBI said in its report.

It said these measures could minimise the snowballing of adverse feedback spillovers of quantitative easing withdrawals taking the locus towards a globally optimal monetary policy.

The report said RBI research suggests a clear relationship between the US Volatility Index (Vix) and the volatility in various financial markets in emerging markets, including India. The Vix is a widely tracked measure of volatility in the US equity markets.