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Some Reflections

From the above discussion, it is clear that the Impact on India would depend on the pace and extent of currency and current account readjustments, and changes in global interest rates. While India by itself hardly contributes to global financial imbalances, any large and rapid adjustments in major currencies and related interest rates or current accounts of trading partners could indirectly impact the Indian economy.

From the case of India, it is also clear that readjustment of the currencies and rise in interest rates would impact different EMEs differently. Despite rise in short-term interest rates, long-term interest rates, instead of rising, have moderated, leading to a further flattening of the global yield curve and narrowing down of credit spreads. EMEs have taken advantage of favourable financial conditions.

During the first half of 2005, EMEs focused on operations aimed at meeting domestic and external obligations and lengthening maturities. However, higher global interest rates could contribute to widening of emerging market bond spreads, particularly those with high debt to GDP ratio. In view of expected deceleration in financial conditions, some emerging markets have cushioned by advancing their external financing, taking advantage of current benign financial market conditions.

Emerging market economies have, however, continued to improve their debt structures in an effort towards reducing their vulnerability to external shocks. EMEs have carried out active liability management operations aimed at meeting their financial requirements while minimising the cost of debt and its risks. Some countries have taken steps to develop their local markets and have reduced the amount of foreign currency-linked domestic debt, while gradually improving the maturity profile. Some of the EMEs have also reduced the share of domestic debt indexed to the exchange rate.

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