Page - 2

Previous

Thus, given the diverse nature, macroeconomic conditions and policy regimes of the EMEs, it may be difficult to treat all of them as contributing to global financial imbalances, in the same manner, nor would all the EMEs be identically affected by the adjustment of global financial imbalances. It may, therefore, be somewhat difficult to speak about the implications of global financial imbalances for the EMEs as a group.

I would, therefore, focus primarily on India, but the analytic framework could perhaps be of some help in appreciating the implications for different EMEs.

It is worthwhile to mention that there are some factors which could adversely impact the EMEs as a group, though with varying intensity. Global developments, particularly those in the world financial markets, have the most direct and serious impact on the financing conditions in the emerging markets. An abrupt and sharp adjustment of the currencies may potentially lead to a significant portfolio rebalancing by the foreign investors, which could cause sharp changes in the long-term yields. This, in turn, could result in volatility in the level and cost of capital flows with direct implications for the EMEs.

Volatility in financial markets could adversely affect the EMEs in many ways, and also in a complex and interrelated fashion. For convenience of analysis, the impact may be classified broadly into: (i) the impact on the financing conditions in which EMEs operate; (ii) impairment of the balance sheets of the banking sector, and (iii) hampering of the growth prospects in the real sector. Even within the same EMEs, the impact could vary across different entities such as the Government, the corporate sector, the households and the financial sector, depending upon the country-specific and institution-specific operating environment, the stage of development and the degree of integration with and exposure to the international financial markets. In view of the diversity of the EMEs and the complexity of impact of any unpredictable unwinding of global imbalances, it is proposed to analyse the possible implications, illustratively, with reference to India.

Next