Build up forex reserves, says Rajan
Mint Mumbai|January 23, 2024
Emerging-market authorities must take action to protect their economies against spillovers from "populist and extreme" macroeconomic policies in the industrialized world, former Reserve Bank of India (RBI) governor Raghuram Rajan said in an interview about his new book. This means building buffers like foreign-exchange reserves. Edited excerpts:
Build up forex reserves, says Rajan

In your new book, Monetary Policy and Its Unintended Consequences, you offer a "sketch of a model" showing how monetary policy spillovers "cause leveraging, booms, and eventually busts in capital-receiving countries." How would you summarize that model?

Monetary policy is a blunt tool, as many have recognized. With an active financial sector, it also becomes a tool with uncertain consequences, since the financial sector can react to extreme monetary-policy settings in unpredictable-and undesirable-ways. For example, a sustained policy of low interest rates engenders risk-taking and leveraging by the financial sector, leaving it exposed to losses when the policy setting changes.

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