Global markets are at risk of a crash if investors decide to offload risky assets created by the loose monetary policies of developed economies, said the Reserve Bank of India’s (RBI) governor, Raghuram Rajan.
Rajan, a former chief economist at the International Monetary Fund (IMF) who was appointed to the post a year ago, has previously warned that emerging markets (EMs) are particularly vulnerable to big shifts in capital flows resulting from the unprecedented monetary accommodation of rich nations.
His latest comments, carried in an interview with the
Central Banking Journal
, compared the current global markets to the 1930s and the onset of the Great Depression.
Rajan said that during the earlier period countries 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,” Rajan said in an interview. He added that he was concerned by the potential scenario of investors exiting markets en masse after buying heavily into assets inflated by 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.
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