It is not Lehman moment yet, says Raghuram Rajan

Economists Raghuram Rajan and Viral Acharya believe the series of rate hikes and liquidity reductions by central banks can lead to accidents, big institutions failing.

Speaking to CNBC-TV18’s Latha Venkatesh, Raghuram Rajan, former RBI Governor said, “All I can say is it's not yet Lehman. Lehman wasn't about raising interest rates. Lehman was, the Fed had raised interest rates, but he had the option of cutting significantly because inflation wasn't as big a concern.”

Rajan informed that the need of the hour is higher interest rates to quell inflation. He said, “Central Banks should not try at the same time to shrink their balance sheets, even though it moves in the same direction. They should leave that aside for the moment, or go slow on balance sheet tightening, because many of them have announced significant balance sheet tightening and they will have to reverse that if they don't want liquidity scales.”

Rajan added that central banks in industrial countries should worry about consequences. “During the time of buildup, easing money through quantitative easing tends to flow through the world and create problems down the line when, when the central banks have to tighten. So you have to be concerned about that.”

He said, “Of course, at this point, we are where we are, the Fed has to tighten, because inflation is up, it may have to stay at relatively high interest rates for a sustained period of time. What is sustained? There is a huge amount of debate about that, but I would say probably not before 2024 will it even contemplate some form of easing.”

Rajan believes that unless there is a dramatic collapse in financial markets, or a dramatic slowdown in labor markets, the Fed is on course till about 4.50-5, pause then and then watch.

Rajan said, “One of the pieces of good news of the last few weeks has been the job openings in the US suddenly come down by a million. So it may be that we are starting to move in the right direction. But still ways to go because labor markets last labor report was still quite strong.”

Speaking about emerging markets Rajan noted that one has to wait and watch and be cautious over this period. He said, “Countries like India or Brazil have significant reserves and that will prove to be a help, if difficulties arise.”

Markets keenly await US inflation reading which may stay uncomfortably above 8%

He added, “I think the issue is we are going to be in a high-interest rate environment after a long period of low-interest rates when countries have borrowed up considerably, corporations have borrowed up many have borrowed in dollars."

"That is not an India problem, but it's a problem elsewhere in the world. So as the dollar strengthens, as interest rates go up, that service goes up and right now what we are seeing is with the enormous withdrawal of funds from emerging markets, bond funds, and so on the appetite to buy new issues is diminishing,” he continued.

India can’t be totally immune to global situation, Rajan said. “It is a tough time, it has always been known that when interest rates go up, money goes back to industrial countries, away from the emerging markets. We have prepared for it in India by building reserves. But it doesn't mean that we will be totally immune. Hopefully, we will weather the shock with minor hiccups.”

Rajan believes it will be difficult for India to reach the aspirational 7-8 percent growth target. He said, “Even before the pandemic, we were seeing a significant slowdown. Now with all the reshoring, de-globalization, plus also the fact that industrial countries now have much higher debt levels as countries.

He further added that, "You mentioned aging that is also starting to hit industrial countries, which way that goes is a big debate. But put all these together and I think the accent has to be on clean, clear reforms, which enhance the domestic rate of growth, without excessive dependence on foreign demand to boost us.”

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