Prudent fiscal policies critical for growth: RBI chief

Our Bureau Mumbai | Updated on July 26, 2019

In the backdrop of slowing global growth, Reserve Bank of India Governor Shaktikanta Das said it is important that policies of monetary and fiscal authorities are well-calibrated so that they support growth without further build-up of leverage and asset price bubbles.

Prudent policies are critical to growth with macro-economic stability, he added. “Globally, we need to focus on policy space, judiciously use it, and simultaneously undertake structural reforms to improve productivity, innovation and job creation.

“The coming year will test IMF for its policy advice in these areas. How the IMF and the central banks provide forward guidance will be key to sustaining global economic growth while maintaining financial stability,” said Das.

In his remarks at senior IAS officer V Srinivas’s book release event in New Delhi, the Governor observed that many advanced economies (AEs) have been pursuing low interest rate policies for long without perhaps adequate recognition of their adverse impacts.

Equity premium

Today, at the global level, the total amount of bonds with negative yields has risen to nearly $13 trillion, implying that nearly a third of AE government bonds trade at negative yields. Equity premium has crossed 4 per cent, which is one standard deviation higher than its long-term average.

“Return to lower interest rates in AEs poses challenges as leverage has already built up in the EMEs and the needed deleveraging is not complete in many European economies,” elaborated Das. Amid low global interest rates, total credit to the non-financial sector in the EMEs went up from 107.2 per cent of GDP at the end of 2008 to 194.4 per cent of GDP by March 2018, before it dropped to 183.2 per cent at the end of 2018.

“This (total credit to the non-financial sector as a percentage of GDP) has posed risks to some EMEs. Some of these risks have surfaced in the form of weak bank/ non-banking balance sheets, and some remain latent and can surface, especially when the global interest rate cycles turn decisively. The world will be looking to the IMF to suggest dependable solutions,” said Das. EMEs, on their part, need to follow policies that promote macroeconomic and financial stability, while focussing on growth, the Governor suggested.

Das said solutions are turning more difficult to come by as the global economy seems to be moving into a new and unsettling phase in an environment of stressed trade negotiations, rising geopolitical confrontation, limited policy space, and high debt levels in several economies.

The Governor observed that the build-up of reserves by EMEs so far is not so much to prop up their currencies as to self-insure themselves against global contagion.

Published on July 26, 2019

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