Global financial markets could witness a series of volatile “tantrums” in the run-up to the US Federal Reserve’s possible rate hikes later this year, warned Reserve Bank of India governor Raghuram Rajan on Thursday.
“Hence, even as efforts continue on building a consensus around the need for a greater degree of coordination among policymakers across the globe, there is a need to be vigilant about the spillovers,” Rajan wrote in his foreword in the Financial Stability Report of the RBI, released on Thursday.
“While foreign portfolio inflows into India have been strong in the past year, unexpected changes in the advanced economies’ monetary policy stances may lead to slowdown/reversal of such flows with implications for segments of financial markets, though India is better prepared to deal with volatility now compared with the previous episodes,” the RBI said in FSR.
Rajan said recent volatility in global markets was just one in a series of greater volatile episodes. Since May, investors have begun dumping bonds across nations, driving up yields as they priced in the Fed’s imminent tightening in 2015. A rise in commodity prices, especially that of oil, also raised concerns among markets which pulled down stock prices as well.
Rajan has, in the past, repeatedly called for greater coordination among central banks across countries and warned that policies driven by local concerns in advanced economies tend to adversely impact emerging market economies. He had also warned against new imbalances in the global economy owing to continued stimulus programmes by central banks of advanced economies even as the Fed began its unwinding simultaneously and central banks of emerging markets began tightening in a big way.
The RBI governor, however, expressed confidence that emerging markets would be able to weather the volatility as they find new moorings. For India, he said, reducing inefficiencies locally and improving in competitiveness will be key.
Earlier this week, the governor had said India would be able to handle any impact emanating out of the Greek crisis.
On domestic economy, Rajan said that macro economic fundamentals have improved and the country has been able to build buffers for any future uncertainty, but he added that “we need to be vigilant”.