Central banks shouldn't prop up falling stock prices: Rajan
Reserve Bank of India Governor Raghuram Rajan called on central banks to avoid giving "booster shots" to stock markets as Asian shares fell the most since 2011.
"It is not the role of the central bank to elevate sentiments unduly, to deliver booster shots to the stock market so that it can soar for a while, only to collapse when reality hits," Rajan told a conference in Mumbai on Monday. "We do not have to look far beyond our borders to see the consequences of such boosterism." More than $5 trillion has been wiped off the value of stocks worldwide since China's yuan devaluation stoked concern global growth is faltering just as the U.S. Federal Reserve considers raising interest rates. Selling pressure engulfed India today as the S&P BSE Sensex index fell 4 percent and the rupee slid 1 percent in Asia's second-worst performance.
Rajan, a former chief economist at the International Monetary Fund, said India is in a "good position" compared with other emerging markets due to strengthening economic growth, moderating inflation, low short-term currency liabilities and a narrowing fiscal deficit. Asia's third-biggest economy has about $380 billion in reserves, he said.
"We will have no hesitation in using our reserves when appropriate to reduce volatility in the rupee," Rajan said. "Once market volatility settles down, India should emerge once again as an investment destination of choice."
Rajan has resisted pressure in recent weeks from India's Finance Ministry to add to three interest-rate cuts this year. He said the central bank uses a number of models to forecast inflation and doesn't rely on a "seat-of-the-pants approach" to setting monetary policy.
"I want rate cuts to not be seen as goodies that the RBI gives out stingily after much public pleading," Rajan said. "Rate cuts are a natural consequence that I can assure you the RBI will have no hesitancy in delivering once we can be assured of low inflation."