Another crash in global asset prices could be brewing according to Raghuram Rajan, Governor of the Reserve Bank of India.
In an interview with the Central Banking Journal, Mr Rajan warned yesterday that economists are "not recognising the overall build-up of risks" in the international financial system. He added: "We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost".
Mr Rajan's views on financial stability hold particular weight because in 2005, when he was chief economist of the International Monetary Fund, he gave a speech in the US at the influential Jackson Hole conference of central bankers, warning that an explosion in financial innovation had made the world riskier, rather than safer.
Mr Rajan's views were dismissed at the time as "luddite" by the former US Treasury Secretary Larry Summers, but they were subsequently vindicated by the global financial crisis three years later, which panned out much as he had predicted.
Mr Rajan said the risk today lies less in credit growth than in elevated asset prices as a result of low interest rates and asset purchase programmes. He said that the impending withdrawal of monetary stimulus by central banks, particularly the US Federal Reserve, could cause a dangerous stampede of investors out of riskier assets.
"There will be major market volatility if that occurs," he said. "True, it may not happen if we can find a way to unwind everything steadily. But it is a big hope and a prayer".
Mr Rajan, who took charge of India's central bank last September, said developing states like his own were at great risk and that a flexible exchange rate would not afford much protection in the event of a crash.
"Of course there is the age-old mantra 'let the exchange rate do the talking and then you are insulated', [but] that advice is garbage" he said.
"A number of emerging markets are not insulated - you are affected, regardless of what kinds of policies you follow".
Despite Mr Rajan's warning about the dangerous side-effects of asset purchases, the president of the European Central Bank, Mario Draghi, repeated that the ECB will launch its own programme of monetary stimulus if inflation in the single currency bloc looks likely to fall further or growth falters.
"The risks surrounding the economic outlook for the euro area remain on the downside," said Mr Draghi. "In particular, heightened geopolitical risk as well as developments in emerging market economies and global financial markets may have the potential to affect economic conditions negatively, including through effects on energy prices and global demand for euro area products."
The ECB voted to keep its main interest rate on hold at 0.15 per cent and its deposit rate in negative territory at 0.1 per cent. But some analysts said an asset purchase scheme from the Frankfurt-based bank was ultimately likely.
"We still see a strong probability of 40 per cent of the ECB opting for broad-based bond purchases in the end," said Joerg Kraemer at Commerzbank.