Ahead of the US Federal Reserve's meeting on Tuesday, IMF Managing Director Christine Lagarde said here that emerging markets like India must prepare for the impact of a rise in US interest rates.
"The danger is that vulnerabilities that build up during a period of very accomodative monetary policy can unwind suddenly when such policy is reversed, creating substantial market volatility," Lagarde said at a public meeting where she was seated alongside Reserve Bank of India Governor Raghuram Rajan.
Reminding the audience of the so-called "taper tantrum" provoking capital flight from emerging markets in 2013, when the US hinted at reducing its $85 billion-a-month in bond purchase programme, Lagarde praised Rajan's deft handling of the crisis spillover in India.
"We already got a taste of it during the taper tantrum. I am afraid this may not be a one-off episode," she said.
The RBI provided good action during the crisis, she pointed out.
"It provided foreign currency liquidity support to key sectors, allowed the rupee to depreciate, and provided judicious foreign exchange interventions to minimise disruptive movements in the rupee," the IMF chief said.
The RBI also checked the surge in gold imports, sharply lowered current account deficits and started to rebuild foreign exchange reserves.
In a very short time, India had successfully contained its domestic and external vulnerabilities, Lagarde said.
