Emerging Markets Need to Take Part in Global Financial Agenda: Rajan

Emerging markets need to participate in setting agenda at the global level to ensure that their interests are taken into consideration in policy formulations by the West, RBI Governor Raghuram Rajan said today.

"One of the biggest deficiencies of emerging markets, as they become bigger players, is they are not participating in setting up the global agenda. They are not participating in changing the system, except as a reaction," Rajan said while interacting with students at the St Xavier's College here.

He specifically cited policy changes like the quantitative easing by the US, saying the domestic policies like that have a huge impact on emerging markets in a highly integrated global market.

Rajan, the academic-turned-central banker who is credited with predicting the global financial crisis, said that voicing of views will have positive effects.

"The IMF today is looking to do some of the things that we have been suggesting, that is look at things like QE and see what the spill-over effects of those might be, to see that on net, they are positive to the world or not," he said.

"Clearly, they (such policies) will have positive effects on the country initiating them, but they should also have positive effects on net for everyone else," he said.

Rajan has been candid in his views on the accommodative policies of the West and their adverse impact on a country like India.

He had also come out strongly against multilateral institutions like the IMF and the World Bank, alleging that "they are not immune to cognitive capture".

"The staff at multilateral institutions is excellent, and well capable of independent judgement. But political pressure subsequent to the initial assessment operates unevenly. Even if multilateral organisations become immune to power politics, they are not immune to cognitive capture," he had said in Washington in April.

While addressing the students, Rajan recalled his association with Chicago's Booth School of Business, saying that the tradition there is to speak out and be as controversial as possible.

"Initially it sounds shrill, initially it sounds like this guy is complaining and I have heard a lot of that over this 'Indian central banker wants Federal Reserve to take India into account when it determines policies....Ha, ha, ha how silly can that be'," he said.

"But over time, the sensible people, certainly the regulators, see that this makes sense... I think there is value to speaking out because eventually we get reaction and change. And so, take the hit initially, it helps later on," Rajan added.

He conceded however that as a practice, central bankers have a reputation not to speak much because of the far- reaching consequences that may have.

On the possible impact of a hike in rates in the developed world and fears of flight of capital out of India because of that, Rajan said: "We need to strengthen our macroeconomic fundamentals to ring-fence against any such eventuality.

"We have to recognise that we are not a reserve currency like the United States and therefore we also have to hold substantial reserves as a buffer. But I want to argue, as I have said again and again, that the best form of protection against volatility, you can't protect against all volatility, but you can protect against investors panicking on you by building a strong marco-economic framework."

He added that "we should not demonize global capital. As a country we have relied on foreign capital inflows for a long time", stressing on the need to have long term flows in form of FDI rather than the fungible portfolio flows.

Rajan also said that it is wrong to blame the greedy bankers alone for the global financial crisis of 2008. "It got precipitated because of a lot of other factors beyond the bankers," he added.

Emerging story. Watch this space for updates as more details come in
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