MUMBAI: Reserve Bank of India governor Raghuram Rajan has taken his battle against the fallout of quantitative easing ( QE ) in the West to Tokyo. The central bank has called for countries like the US to subject themselves to screening by an independent multilateral agency for their spillover effects if there is a complaint from an impacted country.

Speaking at an event organized by the Institute of Monetary and Economic Studies, Bank of Japan, in Tokyo on Wednesday, Rajan again highlighted the spillover impact of unconventional monetary policies such as QE. Last month, speaking at the same topic in the Brookings Institution in the US, Rajan had said that QE in the US would prompt emerging market central bankers to intervene with an objective of depreciating their currencies and that such an intervention could cause a savings glut.

Former chairman of the US Federal Reserve Ben Bernanke had rebutted Rajan's charges and sought to draw a difference between intervention to address volatility and currency intervention as a trade weapon.

Picking up from his earlier call for coordination among central bankers in his speech at the Brookings Institution in the US last month, Rajan said that in an ideal world, unconventional policies such as QE should be vetted by an independent multilateral agency for their spillover effects. For instance, following a complaint by an impacted country, the independent assessor could analyze the effects of such policies and come to a judgment on whether they follow the rules of the game. Policies where the benefits are largely domestic, while the costs fall largely abroad, would be carefully scrutinized. And if the assessor deems the policy reduces global welfare, pressure should be applied to stop such policies.

Rajan described unconventional monetary policies as those that hold interest rates at near zero for long as also the ones like quantitative easing or exchange intervention that involve altering central bank balance sheets in order to affect certain market prices. "Let me first say there is a role for unconventional policies - when markets are broken or grossly dysfunctional or when deflationary expectations are strongly entrenched, as in Japan," he said

According to Rajan, if the idealistic process could not be implemented the world should settle for a more modest proposal where central banks should not just worry about the immediate flows of capital to other countries from its policies, but the longer run reaction such as competitive easing or sustained exchange intervention that this would bring about. "This would allow central banks to pay more attention to spillovers even while staying within their domestic mandate," he said. At the same time, countries that are recipient of inflows arising out of quantitative easing should be discouraged from accumulating substantial reserves by building international safety nets, he said.

