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The US should be more aware of how its policies affect the rest of the world, India’s central bank chief said yesterday, a day after complaining that global monetary policy co-ordination had broken down.
“I have been saying that the US should worry about the effects of its policies on the rest of the world,” Reserve Bank of India Governor Rajan said at an event organised by The Times of India newspaper yesterday.
“We would like to live in a world where countries take into account the effect of their policies on other countries and do what is right, rather than what is just right given the circumstances of their own country,” he said.
Rajan’s comments were echoed by the IMF yesterday, which called for “vigilance” by central banks to ensure that a financial market rout in the developing world does not lead to an international funding crunch.
Raghuram Rajan, a former chief economist at the International Monetary Fund, took charge at the Reserve Bank of India last September during the country’s worst financial crisis since 1991.
India’s financial markets have boomed as US Federal Reserve efforts to bolster economic growth at home with cheap money encouraged investors to seek higher returns in emerging economies. As the Fed began to talk of unwinding its policy last year, the money began to flow back out.
The turn in Fed policy, combined with signs the Chinese economy is slowing, has sent markets from Turkey to South Africa and Brazil reeling over the past week.
Turkey and South Africa responded by raising interest rates this week to help support their currencies. The Reserve Bank of India also tightened monetary policy, saying the action was aimed at pushing down high consumer inflation.
On Thursday, Rajan had called on developed countries to play their part in restoring international monetary co-operation during an interview with Bloomberg India TV.
“International monetary co-operation has broken down,” Rajan told the TV channel.
“Industrial countries have to play a part in restoring that, and they cannot at this point wash their hands off and say: ‘We will do what we need to, and you do the adjustment you need to.’”
The Fed on Wednesday trimmed its monthly bond purchases by another $10bn, despite the turmoil in emerging markets. The action was widely expected, although some investors had speculated that the US central bank might put its plans on hold given the emerging market rout.
The Fed began its super-easy monetary policy in response to the 2008 global financial crisis. Emerging market policy makers have long complained about the risks their countries faced from the massive money printing.
Rajan’s policies since September, including currency swap concessions that helped banks raise $34bn from abroad, have been widely credited with ushering in a recovery in Indian markets.
Government efforts to slash the current account deficit, including through unpopular curbs on gold imports, have also helped foreign investor confidence and the Indian rupee has escaped the worst of the emerging market rout since last week.
Meanwhile, Emerging market stocks and currencies extended their slide yesterday on fears of a protracted capital flight, while a gauge of global equities fell, on track to close its worst month in two years.
European and US stock markets gave back the previous day’s gains, setting up MSCI’s global index for its largest monthly decline since May 2012. Emerging market stocks were down nearly 7% for the month, the worst start to a year since 2008.
But US indexes, after opening trade down sharply, managed to climb back from the day’s lows.
Adding to pressure in emerging market currencies from Turkey to South Africa in previous sessions, the Russian rouble and Polish zloty slid against the US dollar. Government borrowing costs jumped across weaker economies despite local policymakers’ efforts to staunch the bleeding.
“Pressure has now returned to haunt the key emerging market currencies whose central banks have so far raised the cost of borrowing, but pressure valves are also now being tested elsewhere,” said Andrew Wilkinson, chief market analyst at Interactive Brokers in Greenwich, Connecticut. He noted that interest rate increases from Turkey, India and South Africa this week helped reverse the trend in trading on Thursday.
“The week is ending on a bad note as investors reflect on the earlier catalyst indicating potential sluggish growth for the world’s No 2 two economy, China.”
The Dow Jones industrial average fell 105points, or 0.66%, at 15,743.61. The Standard & Poor’s 500 Index was down 6.60 points, or 0.37%, at 1,787.59. The Nasdaq Composite Index was down 9.84 points, or 0.24%, at 4,113.28.
The FTSEurofirst 300 index of top European shares closed down 0.3% after earlier falling nearly 1%.
Poland delayed publication of its monthly debt supply plan until next week due to market turbulence and an overhaul of its pension scheme, a day after Hungary scrapped a bond sale because of a sudden spike in rates.
The benchmark 10-year US Treasury note was up 8/32, the yield at 2.6639%.
Eurozone consumer price inflation dropped in January, bucking market expectations and putting downward pressure on the single currency. Inflation slowed back to 0.7%, the same level as when the ECB, which meets next Thursday, caught markets off guard with a rate cut in November. Unemployment remained at a record high.
The euro was last down 0.4% versus the US dollar, trading at $1.3499.
“It’s now more likely than ever that Draghi is going to have to step in with some extraordinary measure to stave off deflation,” said Aberdeen Asset Management fixed income investment analyst Luke Bartholomew, referring to ECB President Mario Draghi.
Fund investors worldwide pulled $6.4bn from emerging market stock funds in the week ended January 29, marking their biggest outflows since August 2011, data from a Bank of America Merrill Lynch Global Research report showed.
The grab for safer assets meant the dollar had the upper hand in the currency market, pressuring commodities already weakened by the prospects of slower growth.
Gold was caught between the run to safety and the greenback’s surge, and spot prices were little changed. The precious metal was down for the week but on track to post its first monthly gain since last August.
Brent oil and US crude fell 0.9% and 0.1% respectively. Copper fell 0.6% to set a monthly drop of more than 4%, the largest since last June.
Chinese markets were closed for the New Year holiday and will remained closed into next week.