The Reserve Bank of India once again made a case for policy coordination to reduce the spillover effects of changes in the monetary policy stance of advanced economies (AEs) on emerging market and developing economies (EMDEs).

In its 9th Financial Stability Report, the central bank said with the eventual removal of policy accommodation in the AEs, better global policy coordination could reduce unexpected spillovers and improve trust which may be essential for future coordination.

RBI Governor Raghuram Rajan had underscored the importance global monetary policy coordination twice in the last two months — at the Brookings Institution in April and at a conference organised by the Bank of Japan (BoJ) in May.

At the BoJ conference, Rajan suggested that central banks reinterpret their domestic mandate to take into account other country reactions over time, thus becoming more sensitive to spillovers.

In the report, the RBI said that in the absence of global policy coordination, cooperation and global safety nets, EMDEs may have to resort to less than optimal policy options, such as strong macro-prudential measures, including capital controls and reserve accumulation.

Reserve currencies “With their enormous clout, countries whose currencies serve as reserve assets can induce negative externalities on EMDEs through changes in their monetary policies,” it said.

While policy coordination has been initiated in the context of global trade, systemically important banks and other regulatory areas to stem negative externalities, the RBI said policy cooperation/coordination is yet to be recognised in the context of reducing spillovers from changes in monetary policy, especially with respect to AEs.