* In easy-money era, Rajan pushing policy coordination
* Cuts to Fed's bond-buying has roiled emerging markets
* Bernanke, others say domestic needs should be focus
* Global reserves 'safety net' also proposed in Washington
(Adds detail on reserves plan, other comments)
By Jonathan Spicer
WASHINGTON, April 10 The head of India's central
bank ran into a wall of resistance on Thursday when he urged
some counterparts in developed economies to more formally
consider the effects their domestic stimulus has on emerging
Alongside central bankers from the United States, Europe,
and Brazil, Raghuram Rajan took the stage at a high-profile
event here to list his proposals for better monetary cooperation
and a global "safety net" that could provide funds for countries
in case of economic emergency.
He has grown increasingly vocal for change given how hard
the currencies and stocks of emerging economies such as India
have been rocked by big shifts in capital flows brought on by
the unprecedented monetary accommodation in rich nations.
"We should examine the situation and spillover effects, by
all means empirically, to the extent we can," Rajan, governor of
the Reserve Bank of India, said at the Brookings Institution.
"This is not a healthy place," he added.
Emerging markets absorbed a flood of investment in the wake
of the global recession as central banks in developed nations
sharply depressed interest rates, sending investors scrambling
for higher yields in countries like Turkey, Argentina and India.
While the Bank of Japan and the European Central Bank could
pump even more cash into global markets with pending bond-buying
plans, the U.S. Federal Reserve began this year to slow its
money printing, causing headaches for policymakers like Rajan
who saw emerging currencies tumble when the Fed first indicated
bond purchases would be tapered.
Citing an International Monetary Fund report published on
Tuesday, Rajan said the message is: "Industrial countries are
going to do what they have to do; emerging markets have to
"I think we need language which is more even-handed," added
Rajan, a former IMF chief economist. "It's not that emerging
markets have infinite ability to adjust and so we should keep
that in mind going forward."
Seated with him on the stage, ECB Vice President Vitor
Constancio slightly shook his head. "I would not subscribe to
the criticisms," he said, noting that emerging economies were
much closer to full employment than rich nations.
Constancio said past efforts at global coordination failed
in part because emerging-market economies refused to accept that
their currencies would have to appreciate in the face of policy
easing in the developed world.
The euro zone, for one, is struggling with high unemployment
and low inflation, and last week opened the door to more
stimulus. Advanced economies must "do the utmost to sustain
aggregate demand and growth," Constancio said.
Chicago Federal Reserve Bank President Charles Evans, who
was seated next to Rajan, said low inflation was a serious
"If policymakers fail to get on top of this emerging risk
before too long, I'm not sure anyone is going to come out of
this too well," he said. While the Fed pays some attention to
the impact of its policies on emerging markets, its focus is on
the United States, Evans added.
Then, in a surprise to some, former Fed Chairman Ben
Bernanke stood from the audience to ask the first question and
reminded the panel that the Fed's chair or vice chair meets up
to 10 times a year with counterparts in emerging markets.
"There's an awful lot of consultation," he said.
WARMER WELCOME FOR RESERVES PLAN
While central bankers react to foreign events that affect
their economies, they are generally bound by law to stabilize
domestic inflation and, in the Fed's case, maximize employment.
Last year, when Bernanke started discussing the prospect of
trimming a massive Fed bond-buying program, India's rupee
slumped to a record low as investors pulled their
capital from the country.
Now that the U.S. stimulus is winding down, the Fed is
attempting to telegraph a rate rise around the middle of 2015.
That could spell more trouble for emerging markets, Rajan
"In a situation where you have herd behavior, sometimes
transparency and good communications is not the best thing to
do," he said. "When everybody realizes that interest rates are
going to go up in June 2015 ... what do you think will be the
reactions of investment managers, herding into other markets?"
Alexandre Tombini, president of Brazil's central bank, gave
only lukewarm support to Rajan's plea. "I am skeptical that you
can have full (international) cooperation."
Sitting on the same stage, Tombini said his central bank,
like the Reserve Bank of India and others in emerging markets,
has built up reserves of U.S. dollars to help weather any
volatile withdrawal of capital from his economy.
"This is not different from other cycles, it's just an
extreme case," he said.
While Rajan appeared to make little headway on global policy
cooperation, his call for a better system of emergency funds was
more warmly received.
He proposed that a multilateral body provide cash to central
banks to ease pressures on countries to build up currency
reserves as a buffer against sudden outflows. Such a structure
would offer little credit risk and could sidestep the bilateral
swap lines that are in place between many countries, he said.
"Multilateral arrangements are tried and tested, and are
available more widely, and without some of the possible
political pressures that could arise from bilateral and regional
arrangements," Rajan said.
The IMF has in the past proposed such a plan and
policymakers have discussed it. But the main problem is the
market stigma that countries would face if they tapped such
reserves, and Rajan and others on the panel offered little clue
on how that could be avoided.
(Additional reporting by Jason Lange and Jan Strupczewski in
Washington and Suvashree Dey Choudhury in Mumbai; Editing by
Andrea Ricci and Tim Ahmann)