Emerging markets must prepare for the impact of a rise in U.S. interest rates which could surprise in both its timing and pace, the head of the International Monetary Fund said in India on Tuesday.
In a speech in Mumbai, Managing Director Christine Lagarde warned the so-called “taper tantrum” that slammed emerging markets in 2013 could be repeated.
At that time, then-Fed Chair Ben Bernanke sent investors running when he talked about conditions that might cause the Fed to reduce its $85 billion-a-month in bond purchases aimed at stimulating the economy.
“The danger is that vulnerabilities that build up during a period of very accomodative monetary policy can unwind suddenly when such policy is reversed, creating substantial market volatility,” Lagarde said in prepared remarks. “We already got a taste of it during the taper tantrum … I am afraid this may not be a one-off episode.” Lagarde said advanced economies could help reduce the risk of market volatility by communicating policy intentions clearly. But she added that emerging markets that had tackled economic vulnerabilities had fared better when shockwaves hit in 2013.
“In particular, higher GDP growth, stronger external current account positions, lower inflation and more liquid financial markets helped dampen market volatility,” said Lagarde, adding a more resilient financial services sector would help. India, Lagarde said, is pursuing reforms that are “timely, but will also need to be pursued with the utmost speed”.
Speaking at the Reserve Bank of India, Christine Lagarde said central banks should also stand ready to act, with both liquidity support and targeted foreign exchange interventions.
India has cut rates twice in out-of-cycle moves this year. In a statement published alongside its last cut, the RBI said the possible spillover of volatility from international financial markets was “a significant risk”.