Dr Rajan says economic fundamentals do not justify the selloff in emerging markets

Reserve Bank Governor Raghuram Rajan on Wednesday said that "we are in a world of make believe," and wondered "what exactly are the fundamentals?"Acknowledging that we may now be experiencing the darker side of the massive monetary stimulus of past years, Dr Rajan said, "With many central banks with their foots firmly pressed on the accelerator, the variety of new aggressive monetary policies, it's not clear that we've really benefited tremendously.""To some extent we may have reduced the room for other policies or reduced the incentives for other policies. We're not quite sure what the fundamental value of any asset is." ( Read "And I would suspect that this is probably what is going on today, that as there is some anticipation that central banks will start reducing the accommodation, asset prices are trying to find the appropriate level."His comments came on a day when markets across the globe tumbled amid a sharp selloff. The Sensex crashed below 24,000 levels to a 20-month low, while the rupee slipped past 68/dollar for the first time since September 2013, when Dr Rajan took charge of the RBI. ( Read Rejecting the suggestion that emerging markets such as India were falling due to weakness in their economies, Dr Rajan said, "I think it is markets' problem and the market problem can hit the real economy too".Asked if the fundamentals justify the decline in markets worldwide, he said, "Broadly, no.""Of course, it's hard to tell what the right levels for asset prices are, but is there something that changed dramatically over the last few weeks that would say the world economy is heading downwards? I don't think so. In fact, there is a fair amount of sense that, yes, we're trudging along more slowly than we should, but it's not the abyss that we're looking at," he said. ( Read Stating that there were lots of things happening on the ground in India, he said, "Things are moving, actions are being taken.""I think if we persist in this, and I have no doubt that we will, this will amount to something much bigger. My sense is we are something like we were in 2001-02, when we did a lot of work but didn't show up in the growth numbers.""We were laying the stage, and after that we had ten years of very strong growth. So my hope and my expectation is that, (and) that is what we are doing now. A lot of little, little reforms that combine together to make a big reform," he said.