‘IMF Should be Quick to Pro­vide Liq­uid­ity Dur­ing Fi­nan­cial Cri­sis’

The Economic Times - - Economy: Micro, Macro & More - Our Bureau

Kolkata: Re­serve Bank of In­dia gover­nor Raghu­ram Ra­jan said the In­ter­na­tional Mone­tary Fund should cut down on bu­reau­cracy and act quickly in sanc­tion­ing fi­nan­cial as­sis­tance in the form of liq­uid­ity dur­ing a fi­nan­cial cri­sis.

Most crit­i­cal as­pect of any cri­sis is liq­uid­ity that coun­tries need, for which they de­pend on the IMF, the global mul­ti­lat­eral in­sti­tu­tion, which is tasked with the job of guard­ing global mone­tary sta­bil­ity. “We have to see what we need to do to take the back­stop into a fast act­ing source of liq­uid­ity in a very short run. And how we deal with sit­u­a­tions where a liq­uid­ity prob­lem turns into a sol­vency prob­lem,” Ra­jan said at the IMF last week dur­ing the spring meet. “Th­ese are not in­sur­mount­able prob­lems, it just seems to me that we have to spend more time thin- RAGHU­RAM RA­JAN king about them be­cause liq­uid­ity needs are fast, and cer­tainly faster than the time to ne­go­ti­ate, a fund pro­gramme,” he said.

Ra­jan sug­gested that IMF should con­tinue to try to per­suade coun­tries to fill gaps in the global safety net where they are and when they oc­cur.

Emerg­ing economies such as In­dia are in­vest­ing in long du­ra­tion in­fras­truc­ture projects that are largely be­ing funded by ex­ter­nal bor­row­ings. They need pro­tec­tion from sud­den out­flow of “short- term im­pa­tient money when­ever sen­ti­ment to­wards the coun­try changes due to po­lit­i­cal de­vel­op­ments as well as ex­ter­nal­i­ties”.

To guard against liq­uid­ity trou­bles em­a­nat­ing from for­eign cur­rency out­flows, build­ing of for­eign cur­rency re­serves be­comes important. “When the money flows out, peo­ple have an ex­pec­ta­tion that you have enough to pay even if global cap­i­tal mar­kets have stopped func­tion­ing for you. And that helps you pro­tect the value of your cur­rency,” the RBI gover­nor said. “If peo­ple know you have enough re­serves, you have enough to pro­tect your cur­rency, the exit be­comes more or­derly and some­times it doesn’t hap­pen.”

RBI has $360 bil­lion in its cof­fers — enough to pay im­port bill for 10 months. China has seen about $1 tril­lion out­flow dur­ing the same time, forc­ing the Peo­ple’s Bank of China to dig into the coun­try’s re­serves to sup­port the yuan.

RBI Gover­nor

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