Foreign investors are exiting Indian markets amid aggressive rate hikes by the US Federal Reserve, high inflation and a relatively higher valuation of domestic equities.
On Wednesday, the U.S. Federal Reserve lifted its benchmark rate by 0.75 percentage points, bringing total rate hikes to 225bps since March. Experts believe this would result in more fund outflows from emerging markets.
On July 28, the IMF said that the current capital outflows from emerging market economies in Asia, excluding China, are comparable to those in 2013 when the Federal Reserve hinted it might taper bond buying sooner than previously expected, causing global bond yields to rise sharply.
"The outflows have been especially large for India at $23 billion since Russia’s invasion of Ukraine." "Outflows have also occurred from some advanced Asian economies, such as Korea and Taiwan Province of China, as the Fed signals continued rate hikes and geopolitical tensions reverberate," Krishna Srinivasan, director of the IMF's Asia and Pacific Department, wrote in a blog published on Thursday.
Some Asian countries might need to tap measures such as foreign exchange interventions and capital controls to combat any sharp outflow of funds, he added.
Meanwhile, Asia’s share of total global debt has increased from 25 per cent before the global financial crisis to 38 per cent post-COVID, raising the region’s susceptibility to changes in global financial conditions. Sri Lanka is an extreme case, he said where the run-up in debt became unsustainable and the economy lost access to global capital markets, leading to a default on its external obligations.
Furthermore, increased trade policy uncertainty and a fraying of supply chains, which contribute to the trend toward geoeconomic fragmentation, are expected to delay the economic recovery and exacerbate scarring from the pandemic in Asia—one of the biggest beneficiaries of decades of deepening global trade and financial integration.
Asia’s growing inflation pressures remain more moderate compared with other regions, but price increases in many countries have been moving above central bank targets, he noted.
He said that fiscal policy will need to tighten in countries facing elevated debt levels, providing a complement to monetary efforts to tame inflation. He also added that several economies will have to raise rates quickly as inflation is broadening to core prices, which exclude the more volatile food and energy categories, to prevent an upward spiral of inflation expectations and wages that would later require larger hikes to address if left unchecked.
At the same time, further rate rises will squeeze budgets for consumers, companies, and governments that took on substantial debt during the pandemic.
Countries should not wait until it is too late—either to adjust their policy mix where necessary or to rebuild their external financing buffers where appropriate, he concluded.
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