Raghuram Rajan warns of repeat of the 1930 global depression

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26 June 2015

Raghuram RajanPulled in diverse directions by self-centered monetary policies followed by major industrial countries, the global economy could slip into problems similar to the Great Depression of the 1930s, Raghuram Rajan, governor of the Reserve Bank of India, said.

Addressing a conference at London Business School (LBS) on Thursday, Rajan said it was time that central banks from across the world defined 'new rules of the game' in order to reverse the trend.

Rajan, who has been warning against competitive monetary policy easing by central banks, called for coordinated efforts by central banks to set find a solution to the problem.

''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,'' he said.

He, however, said the situation in India is different where the RBI still needs to bring down lending rates to spur investments.

''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,'' Rajan said. ''But I do worry that we are slowly slipping into the kind of problems that we had in the 1930s in attempts to activate growth. And, I think it's a problem for the world. It's not just a problem for the industrial countries or emerging markets, now it's a broader game,'' he noted.

On a possible interest rate cuts in India, he said, ''I try to shut out market reactions as far as I can. We (India) are still in a situation where we have to spur investment and I am worried more about that.''

''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,'' he said.

He said economic growth brings enormous pressure on central banks to take action. He also highlighted that seven years on from the economic crisis, the central banks have done a lot during as well as post-crisis.

"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.





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