Reserve Bank of India (RBI) governor, Raghuram Rajan, who is also credited for predicting the 2008 global financial crisis, said the world is experiencing the darker side of the massive monetary stimulus rolled out by central banks in the years followed the crisis.
"With many central banks with their foots firmly pressed on the accelerator, the variety of new aggressive monetary policies, it's not clear that we've really benefited tremendously." Rajan said speaking on the sidelines of Davos world economic forum (CHK). "To some extent we may have reduced the room for other policies or reduced the incentives for other policies. We're not quite sure what the fundamental value of any asset is," said Rajan.
Rajan’s comments assume significance as the global financial markets are witnessing high volatility in the backdrop of heavy sell-off in in equity markets, crashing crude oil prices and emerging market currencies on a downward spiral mode. Rajan said "we are in a world of make believe," and asked "what exactly are the fundamentals".
Even as the global equity markets are on a free-fall, Rajan sought to allay fears saying things will stabilise and people will look at stable emerging markets, including India. "In times like this, one has to look at the real strength of not only the Indian economy, but also the world," Rajan said.
"One could debate whether our GDP numbers should be higher or lower. But broadly, the numbers do seem to reflect the strength of the economy," he told in an interview to ET Now.
On the stock market rout, Rajan said China could be one of the factors in leading the slump, but easy monetary policies of the past which inflated the asset prices is beginning to happen now, resulting in mayhem across the globe. He also said things are picking up in India and investors are pinning lots of hopes on iconic items like GST.
On global commodity crash, he said the falling prices are good news, which means commodities are now more freely available. In the current scenario, supply has gone up, creating disruption in the market but resulted in the tranfer of purchasing power from the sellers of oil to the buyers, added Rajan.
On the rupee front, Rajan said, the currency has been "relatively strong" in the emerging-market currency basket, but India is affected by the "same kind of jitters" hitting other world markets.
"My sense is that, at this point, if you are an emerging market, you focus on fundamentals, try and get inflation down, try and get your current account deficit down, keep your fiscal on target, do all the good things, and then people reward you," he said in Davos.
Investors "take the money off the table in a hurry when they are doing it everywhere, but then they come back".
"My sense is that after the initial volatility, things will stabilise, people will try and look for the good, stable emerging markets. India is one of them. Our growth is pretty good, all the other indicators seem to be going well," he told CNBC.
While the rupee on Wednesday hit 68.16 per dollar (the lowest since September 2013) before closing at 67.96 per dollar, stocks plunged around 650 points to crash below the 24,000-level on global growth worries before recovering and a sharp slide in oil prices before regaining some lost ground to settle 418 points lower.
On RBI's monetary policy stance next month, he said the rest of the world is facing a deflationary environment and "that will help India disinflate".
"It's helped us quite a bit so far, you're right, the lower price of oil will help," he said.
Rajan is confident that India is on target to meet January inflation target of below six percent.
"Going forward, we have to disinflate a little more. So, at the meeting (on February 2), we will take all these factors into account and decide what the next step is, but broadly I would say we are on the right path," the central banker said.
Asked if there was room to manoeuvre, he said global investors want to be convinced that India will stay the course and will disinflate because they prefer lower inflation.
"So, we need to, at points of volatility, reassure them that this is indeed what we intend to do," he said. "At the same time, you are right that the disinflationary environment around the world does create room, so we have to play these things against each other."
With inputs from Agencies