Emerging economies more vulnerable to shocks: IMF

Updated - May 23, 2016 03:51 pm IST

Published - October 09, 2014 01:05 am IST - WASHINGTON

The Global Financial Stability Report released by the International Monetary Fund (IMF) here on Wednesday 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, triggering a global financial crisis.

Portfolio investments 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 per cent. The heightened risk is on account of these rapidly rising financial market linkages through which shocks can get transferred swiftly.

The finding has implications for Indian policy-makers as foreign portfolio investments in the debt and equity markets have been on the rise.

The phenomenon is also flagged as a threat that could compromise global financial stability in a chain reaction, in the event of geopolitical flare-ups or a less-than-orderly unwinding of the U.S. easy-liquidity monetary policy.

Reserve Bank Governor and former IMF Chief Economist 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 by which 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.

QE easing Mirroring Dr. Rajan’s views, the IMF report warns that 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, besides chances of escalation of geopolitical developments going forward, will determine global financial stability.

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, Financial Counsellor and Director of IMF’s Monetary and Capital Markets Division said at a press conference at the release of the report here on Wednesday.

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