Raghuram Rajan's Call For Coordinated Global Monetary Policy A Distant Dream

BANGALORE: RBI governor Raghuram Rajan has been constantly urging major central banks, particularly the U.S Federal Reserve, to keep in mind the spillover effects of their ultra loose monetary policies on emerging economies such as India. This column agrees that in a highly integrated global economy, the zero interest rate policy (ZIRP) era and Quantitative Easing (QE) measures undertaken my major central banks has affected India to a great extent.

For example, apart from geopolitical tensions, QE has been a major factor which has held crude prices so high after the financial crisis. Thus, to some extent, importing higher energy costs can be attributed to India's inflation woes in recent years.

Governor Rajan's desire that emerging economies have a larger say in setting the global monetary policy agenda is an idea whose time has not come. The reason is simply that the U.S Federal Reserve does not have a preset path to normalising it's monetary policy over the medium term.

Although, the Fed has been reducing it's monthly purchases of bonds and mortgage backed securities (MBS) by $10 billion each month, there is still a lot of speculation amongst market participants as to when the first rate hike would occur.

Remember what the general consensus at the beginning of 2014 for U.S bond yields was? The prevailing view was that U.S ten year yields would be heading north of three percent at least. However, U.S bonds have not sold off as expected and ten year yields are stuck at below 2.4 percent.

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