With Indian and some other emerging markets witnessing a major plunge on global growth headwinds, RBI Governor Raghuram Rajan today said these falls are actually 'markets' problem' and not of the economy.
However, the "problem in markets can hit the real economy also," Rajan said here at World Economic Forum (WEF) Annual Meeting.
Rajan said there have been huge flows in emerging markets but one should also understand that tremendous changes are taking place in emerging markets.
"For example in India there is a massive online market which allows people in small towns and villages to buy things online. Real estate growth has been huge. A trader from Kashmir can sell his carpets to customers anywhere in the world," he said.
Rejecting the suggestions that the fall in various emerging markets were due to weakness in their economies, Rajan said, "I think it is markets problem and the market problem can hit the real economy too".
Speaking at a session on 'The Growth Illusion', the RBI Governor said, "We are in a world (where) we are not quite sure (what) the fundamental value of an asset is".
After there was some anticipation that central banks would start reducing the rates, some asset classes have started finding their own levels, he said.
"It's not very clear whether we have benefitted from the way the rate tightening happened in the recent years at various central banks. Some central bankers in the past including in the US had indeed done a great job," Rajan noted.
Speaking at the same session, UBS chief Axel Weber said there has never been a decoupling in the world economy and if the US stays on the course then dollar is going to get stronger.
He said people do not believe that the US Federal Reserve has got a lot of room for manoeuvring of rates to boost growth and there are better examples across the world such as in India for ways to stimulate the economy.
Stating that "we are in a world of make believe," Rajan wondered, "what exactly are the fundamentals?".
"Perhaps it takes time for efforts to show up in terms of asset prices, productivity etc and then times have changed. Earlier we used to see movie in theatres but now we see on handheld devices," he noted.
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Rajan said there is always a natural reaction to demand lower rates when the real national growth rate is low.
"One of the reasons for lower real growth rate could be investments not picking up. But for investments to pick up there could be many reasons, including demand, and lowering the rates cannot give a real solution.
"I think there is a lot of uncertainties about how the fourth industrial revolution is playing out. There are various other issues that people are thinking about," he noted.
According to him, one of the problem with capital flows is the volatility and there is a problem with many emerging markets that they cannot handle the volatility.
"You need to improve the processes for that.
"Besides, there is a need to actually increase the risk capital. A large amount of equity flows have come to India and they are doing well. When we have big risk capital, the risk appetite also goes up and the volatility can be handled much better. Our own defence is very well," Rajan said.
He was responding to a query on whether India was well placed to handle capital outflow and volatility related risks.
