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Ignoring Rajan’s 2005 prediction was a big mistake: Lagarde

Ignoring Rajans 2005 prediction was a big mistake: Lagarde

Showering fulsome praise on Raghuram Rajan, IMF chief Christine Lagarde on Tuesday said not listening to his prediction of 2008 credit crisis was a big mistake of the multilateral funding agency.

Rajan, now the Reserve Bank Governor, was the Chief Economist and Research Director at the IMF during 2003-2006.

He is credited with correctly forecasting in 2005 an impending global financial crisis at the annual meeting of prominent economists and bankers at Jackson Hole, US.

“The period when nobody was really forecasting the prices that what he did…thing that was one of his many-many accomplishments. One of the many drawbacks of the Fund was not listen to him enough at that time.

“But, we do now pay attention to anything that ‘Raghu’ says,” Lagarde said at an event organised by the Reserve Bank, which the Governor chaired this evening.

Lagarde said India’s monetary policy “rests in good hands” and Rajan was taking several encouraging steps including allowing a greater role for private sector banks.

She praised Rajan for “deftly” steering the Indian economy after the US Fed hinted at withdrawing its easy money policy in May 2013. “Raghu certainly has been very busy since he took over as the RBI Governor in September 2013.

He has deftly steered the Indian economy to safer waters after it was hit by the market turmoil following the ‘taper tantrum’ episode of mid- 2013,” she told a gathering of economists and bankers.

Lagarde, who is here for a two-day visit, welcomed Rajan’s recent step to introduce flexible inflation targeting as the new regime for conducting monetary policy. Rajan’s 2005 comments got him few friends and appreciation but lots of opprobrium and ridicule.

His Jackson Hole prediction came when the US investor community was revelling in the high growth and stable financial conditions then prevalent around the world.

He had argued that the rising complexities of the markets, which spawned more and more complicated instruments like credit-default swaps and mortgage-backed securities, had in fact made the global financial system a much riskier place, not less so as many believed.

Such statements were not taken seriously then.

But just three years later, his comments proved right as the worst financial collapse since the Great Depression of the 1930s hit the world economy by September 2008.

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