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 Global economy is "slowly slipping" into Great Depression-like problems of 1930s, RBI Governor Raghuram Rajan has warned, asking central banks from across the world to define "rules of the game" to find a solution.

Rajan, who is among the few to have predicted the 2008 financial crisis, said the problem was a "broader" one and for the entire world -- not just for industrial countries or emerging markets.

The former IMF Chief Economist, who has earlier warned against competitive monetary policy easing by central banks globally, said the situation is different in India on this front and RBI remains more focussed on bringing down the lending rates to spur investments.
"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 (LBS) conference here last evening.

"I am not going to venture a guess as to how we establish new rules of the game. It has to be international discussion, international consensus built over time after much research and action," the Reserve Bank of India Governor said.

"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 observed.

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

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."

The RBI Governor was addressing the ’Perspectives’ conference organised by AQR Asset Management Institute at the LBS campus on the topic - ’The Central Banker Perspective’.
Rajan highlighted the tremendous pressure for growth which in turn creates enormous pressure on central banks to take action.

He stressed that seven years on from the economic crisis of 2008, the central banks have done a lot during as well as post-crisis.

Way back in 2005, Rajan during his tenure at IMF wrote a research paper on "Has Financial Development Made the World Riskier", where he had warned that the developments in financial sector has made the world "much better off".

But this development has also led to emergence of a whole range of new kinds of intermediaries and "under some conditions, economies may be more exposed to financial-sector- induced turmoil than in the past", he wrote.

Speaking here at LBS event, Rajan said: "The question is are we now moving into a territory in trying to produce growth out of nowhere or we are in fact shifting growth from each other, rather than creating growth.

"Of course, there is past history of this during the Great Depression when we got into competitive devaluation," he warned.

The global GDP is estimated to have fallen by over 15 per cent in the first four years of the Great Depression, which is said to have begun in the US with a ’Black Tuesday’ stock market crash on October 29, 1929.

The global trade is estimated to have more than halved during that period, while almost all countries had to suffer decline in tax revenues, corporate profits and personal income, while unemployment had hit the roof with widespread impact on industries as well as agriculture.

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.