The IMF has asked the US Federal Reserve not to raise its planned interest rate hike until the first quarter of 2016. This means that there will be no chance for capital outflows from EMEs like India which heavily depends upon capital inflows.
In its consultation document, the IMF which is performing an exceptional role as a surveillance institution of the world economy has observed that inflation trend is weaker for the Fed to exit the present easy money strategy.
The Fed has temporarily scheduled its first time interest rate hike in almost seven years towards the end of the year. Many emerging market economies including India were preparing stabisation measures in the context of the interest rate hike by the Fed.
The Fed’s hike in interest rate will see outflow of capital from EMEs back to the US as return may get little bit higher in the US economy.
Experts have noted that the US economy is not in a position to live without monetary push. Similarly, many central bankers have also suggested the US Fed not to begin monetary tightening quickly.
A rise in US interest rate will be a nightmare for EMEs as capital outflows from such an interest rate rise will destabilize their financial markets.
US data over the last few months also doesn’t show any favorable development. In the first quarter of this year, the US economy has shrinked by 0.7 percent according to the macro data published by the state department last week.
The IMF has also assessed that the Dollar is slightly in the overvalued side, indicating that such a situation increases US imports. The Dollar has risen 13 percent in real effective terms over the past 12 months.