Need co-ordinated exit from global stimulus: RBI

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Need co-ordinated exit from global stimulus: RBI

On the occasion of the RBI's 75th anniversary RBI Governor D Subbarao along with former governors Bimal Jalan, YV Reddy and C Rangarajan, spoke to Network18 Managing Director Raghav Bahl and CNBC-TV18 Banking Editor Latha Venkatesh wherein they discussed the state of the economy and the road ahead.

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On the occasion of the Reserve Bank of India's 75th anniversary, RBI Governor D Subbarao along with former governors Bimal Jalan, YV Reddy and C Rangarajan, spoke to Network18 Managing Director Raghav Bahl and CNBC-TV18 Banking Editor Latha Venkatesh wherein they discussed the state of the economy and the road ahead.

Below is a verbatim transcript of the interview. Also watch the video.

Venkatesh: The first question that comes to the mind is that what the world is going through at this point in time - in the last 12 months - is a gigantic experiment in the monetary policymaking. For the first time probably in the history of the monetary economics, so much of money has been pumped in to inflate a deflated economy or economies. How will these steroids play out in terms of aftereffects? How do you think this might pan out - will it be extraordinary inflationary or will it seek other ways to make itself felt?

Reddy: The response is appropriate, coordinated and given the type of challenge, it was better to err on the safer side and inject more liquidity than necessary. The good news again is that the coordination that has happened, I believe that is likely to continue in terms of exit also. It would be more challenging but the very fact that there is consciousness and exchange of views should help, particularly countries like India and definitely globally. During the process of exit naturally there will be some pressure and basically as we expect the pressure to be between the national considerations and global compulsions. The compulsions of national policy making given the exits may sometimes conflict with the global compulsions.

Bahl: There is a fear that we maybe on the verge of severe inflationary pressures, especially because there is such a flush of liquidity through the system. Are you sanguine that the central bankers across the world - I am not talking just about India - are moving well or are equipped to handle it or maybe they are being a bit too liberal?

Jalan: The rest of the world doesn't have this problem.

Bahl: Are we staring at it if this flush of liquidity continues?

Jalan: I don't think this is really a liquidity issue. When you are talking about inflation this year, there are a lot of other issues to take in to account. Liquidity growth and credit growth etc, has been quite modest. So I would not put my finger on liquidity as part of the inflationary problem. But this will take too long to go on into it - apart from the monetary issues, there are other issues that we have to think about.

Venkatesh: Dr Reddy spoke about national level problems in terms of exit. I was wondering wouldn't there be intra-national problems. For instance the fisc or the sovereign everywhere has gotten used to a lot of power. Will they be willing to abandon it that easily and what about industry or what about the real economy and the financial markets?

Rangarajan: This was an extraordinary response to an extraordinary situation. As we all know that it was started out as subprime mortgage crisis, developed in to something, which engulfed the entire financial system. Both the central banks and the governments, in many countries collaborated in trying to solve the problem. It is true that in this situation, the central banks and the governments have acted together. In this situation, you would expect that.

The central banks continue to play the important role that they were playing. You asked about the fact that such a huge liquidity has been pumped in to the system -- it is true. But there will be an attempt to withdraw also. Probably it will take more than a year, as far as the developed countries are concerned. They will probably not start exiting from the present accommodative policy for more than a year.

But beyond that they will have to do it. This kind of an extraordinary accommodation cannot continue forever because the fiscal deficit of the United States is exceeding 10% and the policy rates being near zero, will also cause problems for the United States in terms of the exchange rates. They need capital flows and the capital flows will not be coming. Therefore, sooner or later both the central banks and the government will have to act and at that particular point I am sure that the central bank will begin to assert themselves.