Reserve Bank of India (RBI) governor Raghuram Rajan has said 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.
"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 with Central Banking Journal carried on its website.
The comments reiterate Rajan's previous warnings that emerging markets were especially vulnerable to big shifts in capital flows brought on by the unprecedented monetary stimulus measures that make cheap funds available in rich nations.
His remarks come at a time when the US Federal Reserve has begun easing its monthly bond-buying programme. The Fed's first announcement in this direction had sparked a global market meltdown in June last year, from which the Indian markets began to recover in the run-up to the general elections beginning September 2013.
Rajan said he is 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."
Separately, Rajan said in an analysts call that India will not give up all limits on FII investments in bonds as a precondition for inclusion in global indices for bonds.
Major indices of the world want India to lift caps on foreign institutional money inflows before admitting the country, Rajan said. "I think the indices want for the most part a complete elimination of limits on government securities holdings by international investors," he said, adding that such a condition cannot be met. "We are still in talks... they haven't been abandoned."
Experts feel that inclusion in an index like JP Morgan Government Bond Index-Emerging Markets will help India attract more funds Rajan called the central bank's consumer price index goal of 6% by January 2016 "reasonable", but felt the 4.1% target for fiscal deficit was ambitious.
"The government will achieve it if it does want. It has done before. But how it achieves it is what is important."