IMF should offer faster liquidity support to troubled countries, says Raghuram Rajan

RBI Governor Raghuram Rajan has said that the International Monetary Fund (IMF) should be quick in sanctioning financial liquidity to countries suffering from financial crisis.

IMF is the global multilateral institution which guards global monetary stability, helping countries with financial liquidity.

"We have to see what we need to do to take the backstop in to a fast acting source of liquidity in a very short run. And how we deal with situations where a liquidity problem turns into a solvency problem," Rajan said while at IMF’s spring meet last week.

"These are not the insurmountable problems it just seems to me that we have to spend more time thinking about them because liquidity needs our fast and certainly faster than the time to negotiate a fund program," he said.

Rajan also suggested that the body should continue trying to persuade countries so that gaps in the global safety net can be filled.

Emerging economies such as India are investing in long duration infrastructure projects for which they need funding by external borrowing. This is why they need protection from sudden outflow of short term impatient money, which happens every time sentiment towards the country changes, either due to political developments or externalities.

"When the money flows out people have an expectation that you have enough to pay even if global capital markets have stopped functioning for you. And that helps you protect the value of your currency," the RBI governor said. "If people know you have enough reserves, you have enough to protect your currency the exit becomes more orderly and sometimes it doesn't happen."

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