Emerging Economies More Vulnerable to Shocks: IMF

  • The Global Financial Stability Report released by International Monetary Fund (IMF) warns that the risk of shocks emerging from advanced economies hitting emerging economies, including India, has doubled since the collapse of Lehman Brothers in 2008.
  • The report finds that the share of portfolio investments from advanced economies in the total debt and equity investments in emerging markets has doubled in the past decade to 12%. The heightened risk is on account of these rapidly rising financial market linkages through which shocks can get transferred swiftly.
  • It is a threat that could compromise global financial stability in a chain reaction, a less-than-orderly unwinding of the U.S. easy-liquidity monetary policy.
  • Reserve Bank Governor Raghuram Rajan has also warned of the vulnerability of the global economy and emerging market economies such as India to the U.S. Fed’s imminent reversal of its “Quantitative Easing” (QE) policy , it kept interest rates at near-zero levels to spur domestic demand and kick-start the U.S. economy. This resulted in a flow of dollar investments into emerging markets such as India.
  • With the U.S. economy on the recovery path, the Fed has initiated a reversal of the easy monetary policy.
  • IMF report warns how the U.S. Fed will conduct this reversal, the timing of the unwinding and the manner in which it will communicate the normalisation process.
  • Market sentiment has been resilient, but the Fed will have to conduct the normalisation process in a manner that is in line with their economy’s levels of jobs.
  • At the same time, it must also be mindful of the repercussions of the QE unwinding on the rest of the world.