Reserve Bank of India Governor Raghuram Rajan said in a speech in Chicago that aggressive monetary policy by developed economies may hurt global growth by pushing emerging markets to pile up foreign-exchange reserves instead of spending.
Rajan, a regular critic of the unprecedented monetary stimulus the world's richest nations have put in place, said the world is "setting the stage for a repeat" of the years that followed the Asian financial crisis of the late 1990s.
At the time, developing economies traumatized by capital outflows and painful bailouts started accumulating reserves as insurance, leaving it to US consumers to buoy global consumption, Bloomberg quoted him as saying.
"Any emerging market today is going to look at the currency volatility and say 'whatever money comes in, I'm going to be careful about it, I'm going to build some reserves'," Rajan said. "That kind of policy will depress global demand."
Overseas investors pulled $8 billion from rupee-denominated debt last year, pushing the currency to an all-time low, as the US Federal Reserve signaled it would begin paring its record monetary stimulus.
Rajan, who took office a year ago, has overseen a recovery of the Indian currency, raising interest rates three times in his first five months as he also seeks to tame Asia's fastest inflation.
Indian policymakers have now rebuilt foreign exchange reserves to a near-record high as investors weigh the timing of an interest rate increase by the Fed. India will probably be less vulnerable to a global shift of funds, Rajan said last month.
To sum up his speech, he said:
The world is “setting the stage for a repeat” of the years that followed the Asian financial crisis of the late 1990s (when developing economies started accumulating reserves as insurance)
Any emerging market today is going to look at the currency volatility and say ‘whatever money comes in, I’m going to be careful about it, I’m going to be build some reserves'
That kind of policy will depress global demand
We’ve had six or seven years of this and we still have a weak recovery, so you have to ask ‘is this the answer? (referring to developed economies’ stimulus policies such as record low interest rates and asset purchases)
How much more can you do of this stuff and of course what’s the payback when you’re unwinding?
