Hope central banks would raise rates gradually: Raghuram Rajan

A: I think this is good news which is what the stock market is reacting to, the fact that all the economies are now growing together which has not been there for a long time. Of course in the US, the corporate tax cut has been useful in terms of corporate profitability and so on, so, some of that is a reaction to the good news on that front.

However, yes, you are right, at some point the markets also have to recognise the fact that interest rates will slowly start climbing up. Now the hope is it is going to be gradual, very slowly, that even as the Federal Reserve sort of unwinds its portfolio, the Bank of Japan (BoJ) will continue buying and the ECB will take some time. Now all this is going to happen, the question is at what pace.

If it can happen at a measured pace, the hope is that stock prices and other asset prices, whatever air there is, will leak out very slowly rather than abruptly.

Q: Are you confident that is how it will happen?

A: If you look at past Federal Reserve tightening's, you realise that with the benefit of hindsight, the market always got it wrong. It was always too complacent about the pace of Federal Reserve tightening. Even if we look at what the dot plots tell us over the next year, they are telling us the Fed is probably thinking, at least at this point, of moving faster than what market expectations are. So at some point there is an adjustment.

Now thus far over the last so many years it has been that the Fed has been overly optimistic about growth and therefore the adjustment is that the Fed has come down to the market. Now the question is, is this time going to be different and the market comes up to where the Fed is. Also, Europe is growing gangbusters at this point and unemployment has been coming down fast. Now ECB says we are going to do it slowly, do not worry, we are going to take it as it comes, but it could be that some of the growth data does surprise them on the upside in which case they could move faster.

I think the BoJ is pretty much on hold, though they also have been making noises about the discomfort they have with extreme monetary easing; President Haruhiko Kuroda made a statement last month, and it is possible they could start looking at this sooner than we think.

Q: Barron's wrote an article recently suggesting that you should be the head of the US central bank. What do you think of that?

A: I don't think they were serious. I do think that we have a very good Federal Reserve chairman right now, J Powell. Everything that I have heard about him speaks of his capabilities. He has a vast amount of experience. I think the Federal Reserve is facing a very interesting world, the pace of withdrawal has to be calibrated to the growth of the economy and it is something that they have managed quite astutely under Janet Yellen's time.

Q: What do you think of the mania over bitcoin? Do cryptocurrencies have a future in the world or they are going to give any competition to central banks?

A: I don't think they will give competition to the central banks as much as be complimentary to the existing currencies. I think the parts where they try to do something very different, for example in some of the transactions that don’t want to see the light of day, where people are trying to launder money or take money across borders which the governments don’t want to happen, I think if these currencies become large enough for that to be a big issue, governments and central banks react. You can already see across a number of countries there is worry about the illegal side, but also about the speculative side. A number of countries have come out in the last few days talking about these kinds of worries.

I would think there is a future certainly in the technology as we have discussed before, but also there is a future in a currency which is not necessarily under the hold of one central bank or the other. However, central banks in general have to be supportive because you have to trade out of that currency into the local currency to be able to do anything much with it in the economy and so they have to be supportive of this process.