India needs strong forex reserves and stable macro-economic policy: RBI chief

Raghuram Rajan switches effortlessly between the roles of RBI Governor and academician. This came through clearly as Rajan donned his professorial hat when addressing a packed hall of students at Mumbai’s St Xavier’s College.

Whether he was talking about his recent outspokenness on the financial stimulus in developed markets or urging students to become economists, Rajan had the rapt attention of his young audience during the 45-minute talk.

A former chief economist at the International Monetary Fund (IMF), Rajan had recently questioned the continued benefits of sustained monetary stimulus in the form of quantitative easing by developed countries and its adverse impact on emerging economies.

“One of the problems in dealing with the international banking and finance community is that people don’t want to speak up; partly because of tradition, because central bankers traditionally don’t speak out; partly because reactions can be quite strong, quite offensive. The difficulties of emerging markets is that they do not participate in framing the global agenda and only react to the Western agenda, ” he said, replying to a query from the audience.

The monetary policies of developed countries have a spill-over effect, he said, adding: “You are doing what is best for you but it has a negative effect on us. We are in the same boat, India and the other central banks.”

And though some people may disagree with this thought, there are sensible people who realise it and the “IMF is looking to do some things that we have suggested in terms of the spill-over effects QE (quantitative easing) has on developing countries,” he said.

Before taking questions from the students, Rajan gave them a background of events that led to the economic crisis and the present situation.

The crisis was not created by the rich and greedy bankers, though they may have been part of the problem, he said, underlining the present need to focus on education and healthcare.

India needs substantial foreign exchange reserves and a stable macro-economic policy as a buffer against capital outflows.

“We have to recognise we are not a reserve currency like the United States and, therefore, we also need to have substantial reserves as a buffer. The best form of protection against volatility, to protect against investors panicking on you, is by creating a strong macro-economic framework,” said Rajan.

Replying to another query on foreign funds, he urged the students not to “demonise global capital”.

The danger is to take money in the wrong form, such as to borrow for six months or one year, which creates a near-term problem while ignoring longer-term money, like foreign direct investment or investment in equities, he said.

Advising students on the road ahead, Rajan said: “..you have the luxury of coming from such a fine school, of having career choices… so pick what you find interesting, exciting and where you feel you are making a difference. And don’t pick careers to get ahead. That’s certainly what I have learnt over time: choose what you think is really intriguing and challenging. So, at least you will have a good time doing it.”

Stressing the need to improve the quality of education, rather than the quantity of educational institutes, he urged students of economics to pursue careers as economists, as more opportunities arise due to the small number of economists in the country.

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