Reserve Bank Governor Shaktikanta Das on Friday cautioned that the global economy “seems to be moving into a new and unsettling phase” in an environment of stressed trade negotiations, rising geopolitical confrontation and limited policy space and high debt levels in several economies.
Das said general government debt of advanced economies (AEs) as a group has surpassed 100 per cent of GDP. “Fiscal space is also constrained in many of the advanced economies. It is important in the backdrop of slowing global growth that policies of monetary and fiscal authorities are well-calibrated so that they support growth without further build-up of leverage and asset price bubbles,” Das said.
“Prudent policies are critical to growth with macro-economic stability. Globally, we need to focus on policy space, judiciously use it and simultaneously undertake structural reforms to improve productivity, innovation and job creation,” the RBI Governor said, at a function to release the book ‘India’s Relations with the International Monetary Fund’ authored by V Srinivas, a civil servant of the 1989 batch, who was Advisor to the Executive Director for India at the IMF during 2003-06.
Emerging market economies (EMEs) have accumulated reserves over the past two decades which has significantly reduced the sensitivity of capital flows to push factors. “I may mention that in spite of the insurance coming at a high cost, there is enough evidence to indicate that costs of financial crises have been very high in relation to costs of insurance. Thus, it is evident that build-up of reserves by EMEs, so far is not so much to prop up their currencies as to self-insure themselves against global contagion,” Das said, supporting the build-up of high forex reserves.
Das said many advanced economies (AEs) have been pursuing low interest rate policies for long without perhaps adequate recognition of their adverse impacts. At the global level, he said, the total quantum of bonds with negative yields has risen to nearly $13 trillion, implying that nearly a third of AEs government bonds trade at negative yields.
“Return to lower interest rates in AEs poses challenges as leverage has already built up in the emerging market economies and the needed deleveraging is not complete in many European economies. Amid low global interest rates, total credit to the non-financial sector in the EMEs went up from 107.2 per cent of GDP at the end of 2008 to 194.4 per cent of GDP by March 2018, before it dropped to 183.2 per cent at the end of 2018,” he said.
The net private capital flows to EMEs in the form of direct and portfolio investments also nearly doubled in the post-crisis period, posing risks to some EMEs. “Some of these risks have surfaced in form of weak bank/ non-bank balance sheets and some remain latent and can surface, especially when the global interest rate cycles turn decisively. The world will be looking to the IMF to suggest dependable solutions. EMEs on their part need to follow policies that promote macroeconomic and financial stability, while focussing on growth,” he said.
Das said many AE have been pursuing low interest rate policies for long without perhaps adequate recognition of their adverse impacts. “Today at the global level, the total amount of bonds with negative yields has risen to nearly $13 trillion, implying that nearly a third of AE government bonds trade at negative yields.”