Global markets at risk of crash when world less capable of bearing cost: RBI Gov Rajan

Mumbai: Reserve Bank of India (RBI) governor Raghuram Rajan says global markets are at risk of a “crash” should investors start bailing out of risky assets created by the loose monetary policies of developed economies.

The comments, carried in an interview with Central Banking Journal, reiterate Rajan’s previous warnings that emerging markets were especially vulnerable to big shifts in capital flows brought on by the unprecedented monetary accommodation in rich nations.

The former chief economist at the International Monetary Fund compared the current global markets to the 1930s - a period marked by the Great Depression.

Rajan said back then countries were engaged in a period of competitive devaluation, in a similar way to central banks now being engaged in ever more accommodative policies.

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“We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost,” Rajan said in an interview on the journal’s website dated Wednesday.

Rajan said he worried about the impact of investors exiting 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,” Rajan said.

Reuters