Global crisis to impact India, says IMF chief

The global slowdown will impact economies, including emerging markets such as India and China, in varying degrees due to complex trade and financial market links, according to International Monetary Fund managing director Dominique Strauss-Kahn.

The US slowdown will be both significant and last for some time. "The linkages between the financial and real sector, developed and emerging markets, are much more complex than they were before, he said. Kahn, who is on a three-day visit to India, told a conference at Reserve Bank of India that decoupling between emerging markets and developed economies was a "misleading idea".

Last month, the IMF cut its world growth forecast for 2008 to 4.1 per cent from 4.4 per cent in the face of continued stress in global credit markets.

The need for emerging markets, including India, to act (for dealing with crisis) is less urgent, but you should prepared, Kahn said.

He, however, stressed that emerging market economies such as India and China cannot remain immune from global crisis, which has complex linkages.

On the huge capital flows experienced by India, the IMF chief said that India has received huge capital flows. It (flows) are in response to the country's high economic growth and potential. The flows are also an outcome of the wide interest rate difference that exists in India and US rates.

According to IMF survey, the RBI has actively withdrawn liquidity from the system in an effort to effectively deal with capital flows.

It has also tightened the monetary policy, with the result that India has maintained a wide interest rate margin with the rest of the world, though this may, in turn, be encouraging more capital inflows.

The RBI has adopted a flexible approach to deal with challenges. It allowed exchange rate flexibility to absorb pressures from capital inflows. It has also intervened heavily in the foreign exchange market. Yet reserves rose by nearly $100 billion to about $275 billion, the survey added.