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Rajan urges world to hike rates; but not in a ‘big bang’

Ankara :Under pressure back home to cut rates, RBI Governor Raghuram Rajan today said global economies witnessing sustainable growth need to hike rates although not in a “one go, big bang” manner and that market volatility concerns should not come in the way of central bank decisions.

While Rajan did not name the US or the Federal Reserve, his comments before a grouping of global central bankers and international business community come against the backdrop of the widespread speculation about an imminent rate hike by the US central bank.

He also said that the concerns about market volatility should not come in way of the decision of the central banks.

Back in India Rajan is under intense pressure from the government and the industry to further lower the rates, although he has already announced three cuts of 25 basis points each so far in 2015. RBI’s next monetary policy review is scheduled on September 29.

However, two of his cuts so far this year have been outside the scheduled reviews.

“We risk, as central banks, being trapped in a prisoner’s dilemma: nobody wants to be the first to leave this extremely accommodative situation.

“We prolong a period of extreme monetary accommodation, but without the volatility that eventually has to emerge,” Rajan said here at a meeting of B20 on the sidelines of the G20 Meeting of Finance Ministers and Central Bank Governors.

Rajan, who was scheduled to attend a session on global economy here along with other central bankers and Finance Ministers from G20 nations, said the economies returning to a sustainable growth path need to begin unwinding their should start unprecedented monetary policies which they had resorted to after the financial crisis of 2007-08.

“It is time to plan exits from the extremely accommodative monetary policies we have, and the longer we persist more the economic cost.

“Economies that seem to be reaching takeoff stage should use the opportunity when volatility is relatively low, and actually start moving back to normalcy,” Rajan said without naming the US Federal Reserve.

“Concerns about the eventual normalisation of global monetary policies are already creating an overhang on economic growth, and depressing investment and business activity as investors chase returns and try to avoid risk.

“Interest-rate policies alone can’t help establish healthy economic growth in the world, “ he added.

Rajan said he is not suggesting hike in rates globally “in one go or in one Big Bang “ but market volatility shouldn’t be a factor in deterring central banks in countries registering solid economic growth.

According to him,markets should not be scared of volatility as it would be transient in nature.

Finance “is only a lubricant to growth” and it would be the overall economic policies of the countries that would determine their basic growth momentum, he said.

Referring to uncertainties about a rate hike in the US, he said return to monetary policy normalcy would address the concerns over volatility in the future.

He also warned that the central banks globally might have engendered excessive fragility in the system.