Emerging markets including India need to gear up for a possible adverse impact of a rate hike in the US, which could surprise both in time and pace, International Monetary Fund managing director Christine Lagarde said on Tuesday.
Unconventional monetary easing — an exercise used by advanced economies since 2007 to counter the global financial crisis by purchasing large chunks of government debt — was the central theme of Lagarde’s lecture at the Reserve Bank of India headquarters.
“We are perhaps approaching the point where, for the first time since 2006, the US will raise short-term interest rates later this year, as the first country to start the process of normalising its monetary policy,” Lagarde said. “Even if this process is well managed, the likely volatility in financial markets could give rise to potential stability risks.”
She was referring to the possibility of a sudden capital outflow from emerging markets once the US raises interest rates, and hinted at a repetition of the events of May and June 2013, when the rupee plunged to record lows following indications by the US Federal Reserve that it would taper down asset purchases.
The IMF is of the view that quantitative easing led to a build-up of risks in emerging markets in the form of capital inflows of about $4.5 trillion, almost half of the global figure. Of these flows, India received about $470 billion.
Over the past week, the rupee has shown volatile trends following reports that the Fed wanted to raise rates sooner than expected.
Praising RBI governor Raghuram Rajan, Lagarde said he has been able to successfully steer the domestic economy when the rupee was hit by the turmoil.
The IMF head also said that among emerging markets, “India is shining brightly... it is reaping the benefits of good policies.”