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