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Possible rate hike by US Fed pose risk to market stability: IMF chief

18 Mar 2015 Evaluate

International Monetary Fund's (IMF) Managing Director Christine Lagarde who is on a two day visit to India, though have said that Indian economy is poised to overtake the combined GDP of Japan and Germany in the next four years on the back of recent policy reforms and improved business confidence in the country, but has warned that a possible interest rate hike by the US Federal Reserve could pose risks to market stability in emerging economies, including India, even if it is well managed by central banks.

Lagarde further stated that unwinding of monetary stimulus is likely to start later this year and even if this process is well managed, the likely volatility in financial markets could give rise to potential stability risks. Lagarde warned that if market volatility materialises, central banks need to be ready to act. Temporary, though aggressive, domestic liquidity support to certain sectors or markets may be necessary, along with targeted foreign exchange interventions.

The IMF chief welcomed Reserve Bank Governor Raghuram Rajan's recent step to introduce flexible inflation targeting as the new regime for conducting monetary policy and praised him for 'deftly' steering the Indian economy after the US Fed hinted at withdrawing its easy money policy in May 2013. She said that RBI took 'decisive action during and after' the earlier 'taper tantrum' episode and it provided foreign currency liquidity support to key sectors, allowed the rupee to depreciate, and provided judicious foreign exchange interventions to minimize disruptive movements in the rupee.

Earlier Lagarde has said that “India is a bright spot in the world economy and is increasingly helping to drive global growth'.  She added that, helped by positive policy actions that have improved confidence, and by lower global oil prices, India is set to revitalise investment and accelerate the pace of structural reforms.

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