IMF's Call for Complacence

The International Monetary Fund's World Economic Outlook of April 2016 bodes that emerging market economies, including India, are at risk of sudden capital outflows. The IMF once again makes a case for its conventional, much-discredited tools to manage this risk. To repeat these recommendations, that on many occasions have only worsened crises, is to encourage complacency.

A spectre that haunts a number of so-called emerging market economies (EMEs), including India, is that of a sudden outflow of capital, either because of exit of foreign investors or because of the flight of resident capital. That fear has increased in recent times for two reasons. First, after capital inflows to these economies shrank during the crisis of 2008, they registered a sharp revival and then surged when large quantities of liquidity were infused into the world economy to save the banks and stall the downturn in the developed economies. This increased the stock of footloose capital in these economies, which could unpredictably exit and precipitate a crisis. Second, more recently, triggered by a range of factors varying from the overexposure of financial firms in emerging markets, expectations of increases in interest rates in the United States (US) and slowing growth in the world economy, especially in the emerging markets, a process of capital withdrawal that is destabilising the EMEs has begun.