WASHINGTON DC: The International Monetary Fund has cautioned that emerging economies such as India will need to employ "policy buffers wisely" if they confront significant capital outflows on US Fed Reserve's tapering of monetary stimulus.
"Emerging economies need to facilitate an orderly adjustment in their financial markets. If they are faced with significant capital outflows, policy buffers may have to be used wisely," the IMF said in its Global Financial Stability Report. The report, coming ahead of the annual meeting beginning Thursday, says policymakers need to address domestic vulnerabilities by strengthening macro-financial frameworks and buffers.
Financial authorities may need to intervene to ensure the process is smooth, the report suggested. Developing countries saw a larger than normal surge in investments in debt over the past five years, said Jose Vinals, the IMF's financial counselor. These investments are beginning to go out as interest rates rise in the US and the economy recovers.
India has already borne the brunt of market apprehensions on QE taper with the rupee down over 20% in August from beginning of April. The currency has recovered after the government and central bank brought in measures to attract flows and rein in record current account deficit.
The multilateral institution has said Fed's tapering of the $85-billion-a-month bond buying programme will pose one of the biggest challenges to increased global financial stability. The US central bank is expected to begin the transition early next year once it is satisfied that the world's largest economy is strong enough to stand without extraordinary stimulus.
The report said this US strength should help shore up global financial stability but managing a smooth transition out of the extraordinary bond purchases "could prove challenging" as both interest rates and market volatility rise. "This process will be unprecedented and complex," said Vinals.
"Containing longer-term interest rates and market volatility has already proven to be a substantial challenge, as shown by the sharp rise in bond yields and volatility since May," he added. The report said one potential danger to greater global financial stability is the possibility that long-term interest rates could rise more sharply than anticipated.
In one of the report's recommendations of policies to enhance global financial stability, it asked the Federal Reserve to clearly communicate its intentions on tapering the stimulus. It also wants Europe to move forward on a banking union, a single body that would restructure or unwind failed banks across the region.
"Emerging economies need to facilitate an orderly adjustment in their financial markets. If they are faced with significant capital outflows, policy buffers may have to be used wisely," the IMF said in its Global Financial Stability Report. The report, coming ahead of the annual meeting beginning Thursday, says policymakers need to address domestic vulnerabilities by strengthening macro-financial frameworks and buffers.
Financial authorities may need to intervene to ensure the process is smooth, the report suggested. Developing countries saw a larger than normal surge in investments in debt over the past five years, said Jose Vinals, the IMF's financial counselor. These investments are beginning to go out as interest rates rise in the US and the economy recovers.
India has already borne the brunt of market apprehensions on QE taper with the rupee down over 20% in August from beginning of April. The currency has recovered after the government and central bank brought in measures to attract flows and rein in record current account deficit.
The multilateral institution has said Fed's tapering of the $85-billion-a-month bond buying programme will pose one of the biggest challenges to increased global financial stability. The US central bank is expected to begin the transition early next year once it is satisfied that the world's largest economy is strong enough to stand without extraordinary stimulus.
The report said this US strength should help shore up global financial stability but managing a smooth transition out of the extraordinary bond purchases "could prove challenging" as both interest rates and market volatility rise. "This process will be unprecedented and complex," said Vinals.
"Containing longer-term interest rates and market volatility has already proven to be a substantial challenge, as shown by the sharp rise in bond yields and volatility since May," he added. The report said one potential danger to greater global financial stability is the possibility that long-term interest rates could rise more sharply than anticipated.
In one of the report's recommendations of policies to enhance global financial stability, it asked the Federal Reserve to clearly communicate its intentions on tapering the stimulus. It also wants Europe to move forward on a banking union, a single body that would restructure or unwind failed banks across the region.
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