Indian central bank governor: Low interest rate policy does more harm than good

Reserve Bank of India Governor Raghuram Rajan questioned the central bank’s unconventional monetary policy, arguing that the pursuit of low interest rates will affect savings and fail to stimulate consumption. Rajan’s views also echoed some critics who have criticized the central bank’s policies, including restrictions on digital currencies.

Rajan, a former University of Chicago professor, attended the International Monetary Fund (IMF) spring meetings in Washington, D.C. after leaving his post, where he gave MarketWatch an interview and offered his personal insights.

Rajan believes that the Fed's quantitative easing policy has been criticized constantly, and gradually raising interest rates at a "measured" pace will give the central bank room to turn around when changing unconventional policies. Rajan served as the chief economist of the International Monetary Fund. During his tenure, he expressed concerns about the financial system. He believes that the crisis of the existing financial system is worse than the financial crisis.

Rajan criticizes central bank

Raghuram Rajan

The central bank's negative interest rate policy has attracted many criticisms, and Rajan is one of them. According to CCN , financial commentator Max Keiser pointed out that the lack of funds in the global financial system has led to lower returns, and maintaining the value of assets has become a problem. If one day it cannot be paid, the existing financial system will collapse completely.

Rajan did not highlight digital currencies in his remarks. But banks are under scrutiny for a variety of reasons these days, and it can be seen that banks have shown attempts to control digital currencies.

Russia banned Bitcoin in 2014, according to CCN. Last month, Russia’s deputy finance minister expressed hope that the law on Bitcoin crimes would be submitted to the lower house of the Russian parliament before the end of the August session .

Recently, there have been signs that central banks are taking new action on digital currencies.

The People’s Bank of China will launch its own digital currency soon, CCN reported.

The Payment Policy Department of the Reserve Bank of Australia recently revealed that they have been watching the growth in demand for digital currencies and will issue a central bank digital currency, CCN reported.

The Bank of England is exploring its own decentralized Bitcoin, which will be based on a crypto-currency prototype and purely controlled by the central bank. The currency is named RSCoin, CCN reported.

Global financial reports are bleak

Rajan believes that the IMF financial report reveals the bleakness of the global economy. Under such circumstances, the Fed should not continue to wait for the global financial situation to improve. He pointed out that the report did not explain what caused the economic growth to slow down for seven to eight years after the economic crisis. Some people think it is a debt problem, some think it is a problem of low productivity, and some blame it on the aging population.

Rajan said that public opinion believes that monetary policy has reached its limit. "We do not fully understand the consequences of negative interest rate monetary policy. But I dare say that this monetary policy may not be the best answer and choice."

This has also promoted some small-scale reforms that have positive effects, as well as some large-scale reforms that may have negative effects in the short term. Other countries also have some monetary policies. When the future economy is full of uncertainty, it is difficult to stimulate consumption.

It can be seen that a pragmatic growth strategy is necessary, unless there is a " brain wave " that can accurately predict the future of the industrial world.

Are the growth forecasts correct?

The IMF predicts that growth this year will be much stronger than previously expected and will be revised downwards. But the IMF and other observers believe that this is not actually possible. Rajan also believes that the answer is unknown.

Central banks in industrial countries should consider whether quantitative easing is a good or bad policy. We don't know whether the benefits of this policy exceed a certain level, but we know that the costs of the "ultra- loose" phase will definitely increase. Rajan believes that the policy needs to be revised.

I know that some people jokingly call it an " eliminationist " or "Austrian" approach, but whether our adjustments are sufficient and whether there are too many inefficient companies are indeed very realistic issues.

Does quantitative easing really work?

To illustrate his concerns about quantitative easing, Rajan cited the "bridge problem . " When you build a bridge, you have to extend it to the other side. A bridge that relies on a wealth effect must be "extended" enough to justify rising asset prices, thereby creating a wealth effect. However, over time, it was discovered that the growing wealth was not materialized, and an asset price correction occurred. "I think there is still no definite conclusion on what we are going to experience."

Rajan dismisses concerns that the U.S. needs to do more or follow Japan's lead. He says Japan, with its bank-driven economy, denied the need to "clean up " its big banks and then cleaned up its losses. The cleanup of these banks did not form a business model. Japan's main problem is an aging population, but the cause of the aging crisis remains unclear.

Unlike Japan, the United States is not troubled by an aging population and will be able to "clean up " it more quickly. So why is the U.S. economy still not growing fast?

The root cause of economic stagnation remains unknown

Rajan said he agrees with the idea of ​​"secular stagnation," a long period of slow growth that may have masked a debt bubble, and believes the stagnation has been going on for a long time before the crisis. But the factors that caused it remain unknown.

Janet Yellen, chairwoman of the Federal Reserve, believes that a neutral interest rate should be set that is lower than historical standards. Rajan believes that no matter which model is adopted, when inflation and investment are low, the neutral interest rate can drive investment and construction demand. Low inflation indicates that total demand is low relative to supply.

It is also necessary to promote consumption, because investment alone cannot stimulate growth. We want to promote demand by reducing savings and promoting investment, so investment and consumption complement each other.

Under this model, the equilibrium interest rate is very low. Lowering the interest rate to a very low level will solve some problems to a certain extent. But many questions still remain. When the interest rate is below a certain point, will consumption still exist? Rajan believes that many people have already touched this very important " point ". If the interest rate is lowered to a certain point, the income effect will be greater than the substitution effect.

Generally speaking, if interest rates are lowered, people will feel that consumption is more worthwhile than saving. But if someone's goal is to save for life, low interest rates will make it difficult for them to achieve their goals. However, this will stimulate them to save more money. This is the "perverse effect" of low interest rates .

Is it time to raise interest rates?

Rajan , it's time to consider raising interest rates.

He said he was not accusing the Fed of not acting quickly enough, he thought the Fed was making a reasonable trade-off. He said that as the economy grows, we can get out of this period intact. Our economy has developed so many bubbles that a small move can burst them, and how to get out after that is what we should think about.

Rajan said that he is more worried about the credit problem in the financial system than the crisis in the financial system. One worrying issue is that due to liquidity regulation and capital maintenance fees, the existing economic system has been infiltrated into "market making transactions" . Another worrying issue is that small and medium-sized enterprises are in great need of credit. If we strengthen the management of risky assets, won't these small and medium-sized enterprises be forced into a dead end?

Rajan said that some people accused him of being ambiguous about cross-border loans. First, there are great risks in the flow of funds to one party alone. Second, after weighing the pros and cons, it can be found that cross-border capital flows and cross-border loans are both beneficial. Therefore, he believes that the intensity of cross-border loans is not enough.

Cross-border lending is a positive policy if it is stable, reliable, and can finance crises, but there is also much to be learned from using foreign money to finance domestic crises.

What will foreign investment bring?

Rajan warned that being overly optimistic and “thinklessly” introducing foreign capital will certainly soon touch the legal bottom line and will bring a lot of economic fluctuations to other countries. This is also what the Federal Reserve should pay attention to - don’t get carried away with foreign capital, and use foreign capital to encourage the right type of capital is the serious matter.

Risk-bearing capital may be overlooked and needs to be better understood. Rajan said the Fed should have re-regulated the banking system, but it has gone down a different path.

"What I have to ask now is whether our institutional norms are complete and whether there is a deviation between our expectations and the direction of our efforts. "   He believes that venture capital is most likely to be at a premium in emerging markets, and the information on external resources this brings is worth studying.

India is right

Rajan said that although the Indian economy has become a bright spot in the world economy, it needs to make people more satisfied. Investment is becoming stronger and the macro economy remains stable. Everything proves that medium-speed development has potential.

The current account deficit is close to 1%, and the fiscal deficit has declined. The government is consolidating this. The inflation rate has dropped from 11% to 5%, interest rates have also been reduced, and the government has set a target framework to reduce inflation.

Despite this, the government is still working hard, introducing a new bankruptcy law and new tax policies on goods and services.

Last week, Rajan introduced a new platform that allows bank funds to be transferred between mobile devices. It is an open platform that anyone can use. It is not owned by any company.

When asked about the comparison between China and India, Rajan said that India has lagged behind China for more than ten years since China's reform and opening up. He believes that if India develops in the right direction, it has a chance to catch up with China. He said that Indians admire the Chinese attitude of doing everything possible to get things done. India needs to work harder to build infrastructure and make full use of human capital.

Opportunistic easing?

Rajan said he was reluctant to call his monetary policy "opportunistic easing " . There will be more room for inflation when it happens. It is all predictable driven by the world economy, but no one knows whether the prediction is correct.