Why Raghuram Rajan feels market jitters are just jitters about jitters

There was anxiety and pessimism all around as the high-profile gathering of business and political elite kicked off at Davos, Switzerland, on Wednesday.

The three-day annual meeting of the World Economic Forum is focused on "improving the state of the world", but it clearly showed that the world's most powerful capitalists are feeling as pessimistic about the economy as nearly everyone else.

Also read: Turmoil in markets will not last long: Raghuram Rajan

That was until Raghuram Rajan happened to them. In his first appearance, the Reserve Bank of India governor handled every issue confronting the world markets with such ease that it looked like he knew it was coming.

For minute-by-minute market/stock updates, follow our Twitter handle @ETMarkets

Here is what he said about the ongoing turmoil on stock markets, Indian economy and the disinflationary trend the world over.

Why are stock markets crashing?
Rajan attributed it to jitters. "Everybody is looking at everybody else and saying, "Is this the point where they take the money off the table?' because markets have moved up quite a bit. So that's part of it. Part of it is wondering what is really happening in China, why did the Renminbi start moving a little, and is there more to come? And of course the oil price, how far will it go and does it affect some entity, some lever entity somewhere, which has oil exposure, and does that create problems? So I think some jitters are really jitters about jitters, and some is really wondering about fundamentals," he said.

Is asset price decline irrational?
The high-profile RBI governor doesn't think the fundamentals of the global economy justify the decline in asset prices. "It's hard to tell what the right level 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.

A four-point formula for India
"The Sensex came back quite a bit in the last few hours of trading (on Wednesday) , but also the rupee has been relatively strong amongst emerging market currencies. So we are affected by the same kind of jitters, but my sense is at this point if you are an emerging market, you focus on the fundamentals, try and get inflation down, try and get your current account deficit down, keep your fiscal on target, do all the good things, and then people reward you. They take the money off the table in a hurry when they are doing it everywhere, but then they come back, and so my sense is that after the initial volatility, things will stabilise, people will try and look for the good, stable emerging markets. India is one of them. Our growth is pretty good, all the other indicators seem to be going well," Rajan said.

Will the Indian market bounce?
There are all sorts of forces, says Rajan. "On the one hand, the international investor wants to be convinced that you will stay the course, and you will disinflate, because he prefers lower inflation, or she prefers lower inflation, rather than higher inflation. So we need, at points of volatility, to reassure them that that is indeed what we intend to do. At the same time, the disinflationary environment around the world does create room, so we have to play these things against each other," he said.

India's inflation under check
Rajan said the rest of the world is facing a deflationary environment, and so to that extent, it helps India disinflate. "It's helped us quite a bit so far, you're right, the lower price of oil will help. We, of course, are set on meeting a target of below 6 per cent by January, which, you know, all things put together looks like we'll meet that. Going forward, we have to disinflate a little more. So at the meeting, we'll take all these factors into account and decide what the next step is, but broadly I would say we're on the right path," he insisted.