Mumbai: In an interview to London based Central Banking Journal, Reserve Bank of India (RBI) Governor Dr Raghuram Rajan said that global markets were at risk of a "crash" should investors start bailing out of risky assets created by the loose monetary policies of developed economies.
Dr Rajan has earlier warned that the emerging markets were especially vulnerable to big shifts in capital flows brought on by the unprecedented monetary accommodation in rich nations. He compared the current global markets to the 1930s, a period marked by the Great Depression.
Dr Rajan said that the countries, earlier, were engaged in a period of competitive devaluation, in a similar way to central banks now being engaged in ever more accommodative policies. "We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost," Dr Rajan said in an interview on the journal's website dated Wednesday.
Dr Rajan also said that he worried about the impact of investors in the existing markets all at once after buying heavily into assets inflated by these loose central bank policies. “There will be major market volatility if that occurs. True, it may not happen if we can find a way to unwind everything steadily. But it is a big hope and a prayer," Dr Rajan said.
A former chief economist at the International Monetary Fund, Dr Rajan had famously predicted the 2008 financial meltdown, three years before at an event in US, from which the global economy is yet to recover fully.