RBI chief Rajan calls for global ‘safety-net’ fund

Reserve Bank of India governor Raghuram Rajan on Thursday proposed the creation of a global "safety net" administered by a multilateral body such as the International Monetary Fund (IMF) that could provide funds for countries in case of economic emergency.

Creating such a fund would ease pressures on countries to build up currency reserves as defences against any sudden outflows, said Rajan, endorsing a scheme that has previously been proposed by the IMF.

Rajan, a former chief economist at the IMF, repeated his call for all central banks to be mindful of the impact of their policies on other countries.

The RBI governor went on to propose the appointment of "an impartial international assessor" who could examine the effects of unconventional central bank monetary policies on the global economy, although he did call this recommendation "a little too idealistic".

Rajan's reflections were contained in a prepared speech which the prominent economist was due to deliver at the Brookings Institution in Washington on Thursday.

"We have to design a better multilateral liquidity safety net so that countries do not feel they are on their own in managing market turmoil, and so that they do not build enormous stockpiles of reserves," the text of the speech read.

Rajan, who took the helm of the RBI in early September, has previously criticised the US Federal Reserve for not taking into account the impact of its easy monetary policy on emerging economies.

The Fed's policies, adopted gradually in the aftermath of the 2008 global financial crisis, had propped up emerging markets, but hit India hard last year when investors feared the US central bank would start unwinding its programme.

Although the actual start of the Fed's withdrawal of its monetary stimulus in December had little impact on India after the country took steps to narrow its current account deficit, the RBI has started buying dollars and bolstering its foreign exchange reserves since last month to curb volatility in the rupee after a recent rally.

Rajan said a global safety net would be good policy that could help limit the need to build up reserves, offering little credit risk against what he called "extreme balance sheet policies," without specifying whose policies he was referring to.

"Multilateral arrangements are tried and tested, and are available more widely, and without some of the possible political pressures that could arise from bilateral and regional arrangements," Rajan said.

"Indeed swap arrangements can be channelled through multilateral institutions like the IMF instead of being conducted on a bilateral basis."