Mumbai: RBI Governor, Raghuram Rajan has proposed the creation of a global 'safety net', which will be administered by a multilateral body such as the International Monetary Fund (IMF) that could provide funds for countries in case of economic emergency.
'Providing such cash 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 and discussed by policymakers.
He even further proposed 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 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," highlighted Rajan.The Fed's policies, adopted gradually in the aftermath of the 2008 global financial crisis, had propped up emerging market assets, but hit India hard last year when investors feared the US Central Bank would start unwinding its programme.
The rupee slumped to a record low in late August, as investors feared outflows in a country that depends on foreign capital to bridge its current account deficit. RBI has also started buying dollars and bolstering its foreign exchange reserves since last month to curb volatility in the rupee after a recent rally. Rajan stated that 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.
"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," added more.
"Indeed swap arrangements can be channelled through multilateral institutions like the IMF instead of being conducted on a bilateral basis." concluded Rajan.
