Reserve Bank governor likens investors’ attitude with that of gamblers
Reserve Bank of India governor Raghuram Rajan (Photo: DC/File)
Mumbai: Reserve Bank of India 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 Dr 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. Dr 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.
“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 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.
“The kind of language that we hear is akin to gaming. Investors say, ‘we will stay with the trade because central banks are willing to provide easy money and I can see that easy money continuing into the foreseeable future’. It’s the same old story. They add ‘I will get out before everyone else gets out’. They put the trades on even though they know what will happen as everyone attempts to exit positions at the same time. 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 explained.
Talking about India’s problems in 2013, Dr Rajan said “What happened in May 2013 was a wake-up call. It came after Indians had made a substantial expansion in our purchases of gold, which widened our current account deficit. Those purchases of gold came in April and May 2013 and were extraordinarily high. We were caught by the Fed announcement at a time when we were, in some ways, least prepared for a tightening of financial markets.” — Reuters
( Source : reuters )
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