Three years before the 2008 global financial crisis, an Indian economist named Raghuram Rajan presciently warned a skeptical audience of top economic thinkers that excessive risk threatened the entire global financial system.
As Rajan stepped down on Sunday as India’s top central banker, following intense criticism at home, he offered a new warning: Low interest rates globally could distort markets and would be difficult to abandon.
Countries around the world, including the US and many in Europe, have kept interest rates low as a way to encourage growth.
Photo: Bloomberg
However, countries could become “trapped” by fear that when they eventually raise rates, they “would see growth slow down,” he said.
DEEPER CHANGES
Low interest rates should not be a substitute for “other instruments of policy” and “various kinds of reforms” that are needed to encourage growth, Rajan said in a recent interview with the New York Times.
“Often when monetary policy is really easy, it becomes the residual policy of choice,” he said, when deeper reforms are needed.
His warning comes at a time when the world’s central banks appear to be at a loss about how to get global growth moving again.
A growing number of voices say that low rates are not doing the job and that governments must take other, more politically difficult steps to reinvigorate growth.
The warning by Rajan, 53, came as he stepped down from a position that had helped make him something of a rock star — albeit a controversial one — in India.
He disputed the view that his tight monetary policies had cost him the support of the government, and he said that his departure was based on his inability to reach an agreement with the government on serving longer, but not serving another full three-year term.
ACHIEVEMENTS
Rajan, whose term expired on Sunday, is credited with helping stabilize the Indian economy. It was fighting double-digit inflation, a weakening of its currency and a plunging stock market when he took the job in 2013.
However, he also leaves bruised after a barrage of public attacks from the political base of conservatives and small-business interests of India’s governing Bharatiya Janata Party.
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