Raghuram Rajan warns of global threat from easy money

By John O'Donnell

FRANKFURT (Reuters) - The head of the Reserve Bank of India (RBI) has warned about the risks of easy money, urging the United States to raise the cost of borrowing sooner rather than later regardless of the jolt this may give markets.

Speaking at an event with the head of Germany's Bundesbank, who sent a similar message, Raghuram Rajan said that low borrowing costs and money printing were a threat to financial stability and would lose effectiveness over time.

Rajan, who is worried that shrinking returns on investments in Europe prompt a flood of investment and inflation in India, said "extremely aggressive monetary policy ... eventually may have tremendous consequences for financial stability".

"If everyone is doing it, you won't get much benefit out of it," he said.

Speaking on the same podium, Jens Weidmann, the head of Germany's central bank, backed Rajan's warning.

"I share the concerns regarding monetary policy that is too loose for too long," he said.

Rajan said that the Federal Reserve's likely increase in interest rates in December could upset markets but that it was nonetheless necessary.

"The liftoff has been one of the most widely advertised factors," he told an audience of students.

"I think there will be volatility but I think we have to bear it. I worry more about the consequences of staying in the ultra accomodative ... world," he said.

(Reporting By John O'Donnell; editing by Francesco Canepa/Jeremy Gaunt)