India backs fund pool to help smaller economies in distress

India has backed a global pooling of funds to help out small countries facing liquidity shortages to access funds quickly. The proposal came up during the ongoing spring meeting of the International Monetary Fund and its sister organisation, the World Bank in Washington.

Speaking at a panel discussion on the global financial safety net, Reserve Bank of India governor Raghuram Rajan said India is willing to be part of an IMF-coordinated pooling arrangement to help countries across the world to meet short-term liquidity shortages that could arise due to various reasons.

India already has foreign exchange swapping arrangements with its smaller neighbours to help them out of short-term liquidity problems.

Rajan also pointed out that countries will have to be helped in a manner to ensure that there is no stigma attached to this kind of temporary monetary help from the fund.

The RBI governor also pointed out that countries will have to be helped in a manner to ensure that there is no stigma attached to this kind of temporary monetary help from the fund.

''One of the worries across the world is whether small countries can access in quick time liquidity if they need it. We have neighbours some of whom are in stress and we provide them liquidity. The question is whether we should be relying on these regional arrangements or should we have a more global arrangement,'' he said, adding speed and coverage are some of the important factors to be taken into account. ''Speed is important. Some of our arrangements don't have sufficient speed. Coverage is important. Our coverage is not in the right places to the right extent,'' he said. ''Yes over time the fund (IMF) will always step in but the question is whether they will step in time,'' he added.

He also pointed out that countries will have to be helped in a manner to ensure that there is no stigma attached to this kind of temporary monetary help from the fund.

Typically, IMF's financing instruments come with many conditionalities, provide too little financing at a cost that is too high, and send negative signals to the public and markets alike, increasing the stigma attached to such lending.

''What kind of facilities are there to meet the liquidity crunch? This is where the stigma issues come in. Whether those countries going to the fund facilities go freely well in advance? They typically wait till it's too late because they fear the political fallout if they go to the fund facility,'' he said.

He suggested that advanced economies and emerging economies with sufficient foreign exchange reserves could pool resources to set up this arrangement.

''We are participating in some of the regional arrangements. In fact, we have the Saarc facility which is available to South East Asian countries. It has actually been drawn down,'' he said. ''In fact, if we do decide on a pooling arrangement, India will be a part of such an arrangement,'' he added.