U.S. should be mindful of global policy impact: Rajan

MUMBAI Fri Jan 31, 2014 9:35pm IST

Reserve Bank of India (RBI) Governor Raghuram Rajan leaves after a news conference for the mid-quarter monetary policy review at the RBI headquarters in Mumbai December 18, 2013. REUTERS/Danish Siddiqui/Files

Reserve Bank of India (RBI) Governor Raghuram Rajan leaves after a news conference for the mid-quarter monetary policy review at the RBI headquarters in Mumbai December 18, 2013.

Credit: Reuters/Danish Siddiqui/Files

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MUMBAI (Reuters) - The United States should be more aware of how its policies affect the rest of the world, the Reserve Bank of India (RBI) chief said on Friday, a day after complaining that global monetary policy coordination had broken down.

Raghuram Rajan, a former chief economist at the International Monetary Fund, took charge at the RBI last September during the country's worst financial crisis since 1991.

India's financial markets have boomed as U.S. 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.

"I have been saying that the U.S. should worry about the effects of its policies on the rest of the world," RBI Governor Rajan said at an event on Friday organised by The Times of India newspaper.

"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 on Friday, 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.

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 cooperation during an interview with Bloomberg India TV.

"International monetary cooperation 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 $10 billion, despite the turmoil in emerging markets. The action was widely expected, although some investors had speculated that the U.S. 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 $34 billion 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.

GRAPHICS: Currency Contagion - click here

(Additional reporting by Subhadip Sircar in Mumbai and Anna Yukhananov in Washington; Editing by Tony Munroe/Ruth Pitchford/Chizu Nomiyama)

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