Only low interest rates cannot sustain economic growth

 

Warning against low interest rates, former Reserve Bank of India (RBI) governor Raghuram Rajan has said such measures by central banks cannot substitute other policy instruments and broader reforms and expressed hope that his successor will finish the process of cleaning banks balance sheets.

 

In an interview to the New York Times published on Monday, Rajan hoped that the country will finish "the process of bank clean-up, which is under way".

 

The RBI undertook an asset quality review of banks by issuing blanket orders to classify loans to certain accounts as non-performing assets. The provisions led to record losses by lenders and Rajan set them a deadline of March 2017 to get done with the clean-up act.

 

Gross non-performing assets ratio has shot up to 7.6% from 4.2% in September 2013, while the overall stressed assets are estimated to be over 14.5%, almost double the level when he took over.

 

Rajan, who demitted office on Monday as RBI governor, cautioned that low interest rates globally could distort markets and will be difficult to abandon.

 

"Countries around the world, including the United States and Europe, have kept interest rates low as a way to encourage growth. But countries could become "trapped" by fears that when they eventually raised rates, they "would see growth slow down", he said.

 

Low interest rates should not be a substitute for, "Other instruments of policy" and "various "kinds of reforms" that are needed to encourage growth, he said, adding that "often when monetary policy is really easy, it becomes the residual policy of choice, ...When deeper reforms are needed".

 

The statement assumes significance as central banks around the world appear to be at a loss about how to get global growth moving again.

 

Rajan, who predicted the 2008 global financial crisis, also rejected claims that tight policy stance followed by him was the reason behind the government not obliging him with a second term.

 

"I don't think it's fair to say that it's because of tight policy that the government wanted to move on," he said.

 

 

Defending his tight monetary policy, he said it had helped bring down the rate of inflation – currently about 6% – to the upper end of the government's target range.