The largest industrial countries are flouting global financial rules against beggar-thy-neighbor currency depreciation, and the International Monetary Fund (IMF) has to be a more neutral referee and flag offenses, said Raghuram Rajan, the governor of the Reserve Bank of India, on Thursday.
“We really need to assess our rules of the game,” Rajan said in a speech at a seminar on the sidelines of the IMF/World Bank spring meetings.
Group of 20 officials have accepted the recent decline in the yen and the euro as the by-product of monetary policies designed to spur domestic demand.
But Rajan said this was just a “fig leaf” for foreign exchange manipulation and that the richest countries were ignoring the spillover effects on emerging markets.
The IMF needs to play a more neutral role and ferret out currency manipulation wherever it can be found.
The rule has to be “if it walks like a duck or quacks like a duck, it is a duck,” Rajan said.
India has been taking baby steps toward full capital-account convertibility but still places restrictions on swapping rupees for other currencies. Rajan has recently called for full capital-account convertibility.
At the seminar, Olivier Blanchard, the IMF’s chief economist, said he strongly disagreed with Rajan. He said the main effect of Europe’s quantitative easing has been lowering long-term interest rates.
Rajan also criticized many central banks, including the Federal Reserve, for asserting they must follow domestic mandates in setting policy.
“At what point does the domestic mandate get trumped by international responsibility,” he asked. “If it never gets trumped, then let’s stop talking about international responsibility,” he said.
He said that central banks must be concerned with being good global citizens and that this “bites at certain times.”
“We need arbiters like the IMF to tell us when domestic policies have international effects that do more harm than good,” Rajan said.
Undertaking policies that give a country a temporary advantage to escape deflation “may be needed” but we need rules to dictate when that would be appropriate, he said.
“You can’t pull yourself out of crisis by depreciating your exchange rate, and then turn around and point a finger at everybody else,” Rajan said.
Source: MarketWatch
