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London: The global economy is slowly slipping into problems reminiscent of the Great Depression of the 1930s, Reserve Bank of India (RBI) governor Raghuram Rajan has warned, asking central banks from across the world to define “the rules of the game" to find a solution.

Rajan, who is among the few to have predicted the financial crisis triggered by the September 2008 collapse of Lehman Brothers Holdings Inc., said the problems today aren’t restricted to industrial economies or emerging markets but encompass the entire world.

“We need rules of the game in order to effect a better solution. I think it is time to start debating what should the global rules of the game be on what is allowed in terms of central bank action," he said at a London Business School conference on Thursday evening.

Rajan’s comments come in the backdrop of so-called quantitative easing by the US Federal Reserve and economic stimulus programmes undertaken by other central banks that led to a global gush of liquidity in the aftermath of the 2008 crisis. The $3.5 trillion bond buying programme by the Fed came to an end last year.

As the US central bank now prepares to raise rates, emerging markets are bracing for capital flight.

“I am not going to venture a guess as to how we establish new rules of the game. It has to be an international discussion, international consensus built over time after much research and action," said Rajan, who has previously warned against competitive monetary policy easing by central banks globally.

““But I do worry that we are slowly slipping into the kind of problems that we had in the thirties in attempts to activate growth. And, I think it’s a problem for the world. It’s not just a problem for the industrial countries or emerging markets, now it’s a broader game," he said.

The Great Depression refers to a period of severe global economic downturn in the 1930s, which affected almost all countries across the world. It started in 1929 and continued till the late 1930s and still remains the longest and most widespread global recession.

Global gross domestic product is estimated to have fallen by over 15% in the first four years of the Great Depression, which is traced back to the ‘Black Tuesday’ stock market crash in the US on 29 October 1929. International trade is estimated to have more than halved during that period and almost all countries had to suffer a decline in tax revenues, corporate profits and personal income, while unemployment soared.

In India now, Rajan said RBI remains more focused on lowering lending rates to spur investment. RBI has cut its key repo rate three times this year by 25 basis points each. One basis point is one-hundredth of a percentage point.

Asked specifically about interest rate cuts from an Indian perspective, Rajan said: “I try to shut out market reactions as far as I can. We (India) are still in a situation where we have to spur investment and I am worried more about that."

“So I shut out the asset price reaction and think more about—is this going to bring bank lending rates down and therefore channel cheaper credit into firms and then they will invest?. However, the issue gets much more complicated for other markets."

Rajan highlighted the pressure to spur economic growth, which in turn creates enormous pressure on central banks to take policy action.

In 2005, Rajan, during his tenure at the International Monetary Fund, wrote a research paper, Has Financial Development Made the World Riskier?, in which he warned that “under some conditions, economies may be more exposed to financial-sector-induced turmoil than in the past".

At the London Business School, Rajan said: “The question is, are we now... trying to produce growth out of nowhere or we are in fact shifting growth from each other, rather than creating growth." He added: “Of course, there is past history of this during the Great Depression when we got into competitive devaluation."

Rajan also highlighted the need for countries to work together on capital flows. “We have to become more aware of the spill-over effects of our actions and the rules of the game that we have—of what is allowed and what is not allowed—needs to be revisited," he said.

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