"Unfortunately, a number of macroeconomists have not fully learned the lessons of the great financial crisis. They still do not pay enough attention - en passant - to the financial sector. Financial sector crises are not as predictable. The risks build up until, wham, it hits you," Rajan has said in the interview.
A sudden shift in asset prices could happen in a variety of ways, Rajan was reported to have said in the Central Banking Journal.
The most obvious route would be as a result of investors chasing higher yields at a time when they believe central bank policies will protect them against a fall in prices. "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," says Rajan. "True, it may not happen if we can find a way to unwind everything steadily. But it is a big hope and prayer."
Euro is too strong
Rajan says the eurozone faces similar problems to emerging market economies, as it is affected by spillovers from ultra-loose monetary policies being pursued by the central banks such as the Federal Reserve, Bank of Japan and Bank of England. The RBI governor pointed out that Europe faces a disinflationary environment, close to deflation, despite pursuing a "very, very accommodative policy".
"The exchange rate is too strong given the euro area's economic standing," Rajan says. "In a world where demand is weak and not strongly influenced by monetary policy, the effect of monetary policy may be more in ‘demand shifting' that is operating through the exchange rate, rather than ‘demand creation' that is operating through credit growth and credit flows domestically."
Courtesy: inputs from Central Banking Journal