Global economy may be slipping into 1930s-like depression, warns Rajan

Reserve Bank of India (RBI) Governor Raghuram Rajan has asked central banks from across the world to define “new rules of the game” as he warned that the global economy may be slipping into problems similar to those faced during the Great Depression of the 1930s.

Rajan, who has been warning against competitive monetary policy easing by central banks, however, said the situation is different in India, where the RBI still needs to bring down lending rates to spur investments.

‘Debate central bank action’

“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 be on what is allowed in terms of central bank action,” he said at a London Business School (LBS) conference here last evening.

“I am not going to venture a guess as to how we establish the new rules of the game. It has to be an international discussion, an 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; it’s now a broader game,” the RBI Governor noted.

Investment concerns

Asked specifically about interest-rate cuts from an Indian perspective, 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.

The RBI Governor was addressing the ‘Perspectives’ conference organised by AQR Asset Management Institute at the LBS campus on the subject of ‘The Central Banker Perspective’.

He highlighted the tremendous pressure for growth which, in turn, creates enormous pressure on central banks to take action.

Rajan stressed that seven years on from the economic crisis, central banks have done a lot.

Shifting growth

“The question is are we now … in trying to produce growth out of nowhere … shifting growth from each other, rather than creating growth.

Of course, there is a past history of this during the Great Depression, when we got into competitive devaluation,” he warned.

Rajan also highlighted the need for countries to work together on capital flows.

“We have to become more aware of the spill-over effects of our actions. And the rules of the game that we have — what is allowed and what is not allowed — need to be revisited,” he said.

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