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RBI Governor rules out financial crisis
27
Aug '15
Raghuram Rajan
Raghuram Rajan
Despite the recent stock market crashes around the world on the heels of China devaluing the yuan, Reserve Bank of India Governor Raghuram Rajan has said he doesn't believe that there's a financial crisis looming.

"Based on what I've seen so far there's no strong reason to believe that we're on the verge of another crisis. But we have to be vigilant about some of those fragilities that have built up," he told the BBC.

Referring to the recent developments in China, he said, “Every adverse development across the world affects the rest of the world in some way. It works through financial markets first, then trade later. So it's something that everyone is concerned about. But you have to be careful about attributing everything to China. There are a number of concerns about when interest rates will normalise around the world - and there's also questions about whether some markets are just too high."

Rajan said it will be “a long time” before India can replace China as a growth engine for the global economy, even if it grows at a faster rate.

Asked whether India can replace China as a new growth engine, Rajan said, “India is one-fourth to one-fifth of China's size. Even if we can overtake China in terms of growth rates, the magnitude of the effect will be far smaller for a long time to come.”

The RBI chief has been under political and industry pressure to cut interest rates to boost growth, but has resisted such calls so far although he cut rates marginally thrice last year.

But he alluded to the challenges central bankers face when they're tasked with the job of fixing their economies. Rajan also hinted that using cheap money to tackle economic problems - rather than painful reform - had to stop.

"I have been a little concerned about the immense burden for action that is falling on central banks and I think it is quite legitimate for central banks to say at some point we can't carry the burden ourselves," he said when asked about what he would do if he was running China's central bank.

"In fact we may not have the tools to do everything that is asked of us. Don't keep asking us to do more because at some point we get into territory where the consequences may be more bad than good if we actually act."

Rajan acknowledged that his situation was not typical in the current climate, because unlike most global economies, India still has high inflation - running at close to 6 per cent. Interest rates are also high - at 7.25 per cent despite having been cut three times this year to try and stimulate growth.

"In my country I'm faced with traditional central bank problems like inflation so we still have a handle to work with those," Rajan said.

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