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It’s a relief that Raghurajam Rajan will continue as Reserve Bank Governor. As one who saw the 2008 crisis coming, he can help India navigate the effects of the QE taper (and much more). These could be quite serious, as pointed out by him in a recent talk in Tokyo. His call for an independent monetary authority to check the spill-over effects of ‘unconventional monetary policies’ such as QE should be seriously taken up by the new government in forums such as the G-20, which meets in Brisbane this November. Meanwhile, the Ukraine crisis too has the potential to shake up the world of finance, with Russia and China deciding to conduct bilateral trade in their respective currencies.
Rajan anticipates trouble as the QE exit gathers momentum. Lenders may all rush for the exit, driving down asset prices and the exchange rate. Being put to trouble for no fault of their own, he observed in Tokyo that “recipient countries may (or should) call for an exit whose pace and timing is responsive…to conditions they face”. Central banks in the West should also worry about the “longer run reaction such as competitive easing or sustained exchange rate intervention”. Rajan observes that the inflows per se create a situation of over-leveraging, as a result of which the reversal can actually look more like a nosedive. If Rajan favours a mopping up of dollars to deal with this contingency, the Government should give him a free hand.
The RBI has evolved a studied position that capricious capital flows can make a mockery of monetary policy independence. Rajan can take this institutional knowledge forward. The RBI is trapped in a ‘trilemma’ — where both the exchange rate and interest rate can be simultaneously managed only when capital flows can be predicted and controlled. Its task is further complicated by rising government spending, exerting pressure on inflation and interest rates. As a result, it is left with very little room for manoeuvre. Rather than make matters more difficult for RBI, New Delhi should leave it to Rajan to manage a soft landing.
Senior Assistant Editor
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