The Hindu Business Line : ‘Sub-prime crisis may hit emerging economies’

The US sub-prime mortgage turmoil could weigh heavily on the future stability of financial markets and is also likely to have a wider impact on global growth, with particular concerns centred on the prospects for emerging market economies, said Mr Rakesh Mohan, Deputy Governor, Reserve Bank of India.

“If credit conditions tighten, emerging market economies could become particularly vulnerable to reversals of capital flows with serious implications for their future prospects,” he said.

Capital reversals

Speaking at the IIF Asia Economic Forum here on Thursday, Mr Mohan felt that the slowing down of the US economy, in combination with capital reversals, could also have adverse consequences for growth on a prolonged basis by affecting exports of manufactures and services, depending on the extent of linkage with the US economy.

However, the flight of capital to safety through diversification could even enhance capital flows to these countries, he felt.

“In general, recent financial market developments are indicative of evolving uncertainties for such economies with significant challenges for the conduct of monetary policy and for ensuring financial stability in their economies,” Mr Mohan said.

Referring to the situation in India, he recalled the RBI Governor, Dr Y.V. Reddy’s recent speech in Mexico, which said, “The recent gains in bringing down inflation and in stabilising inflation expectations should support the current expansionary phase of growth cycle.

“It is, however, necessary to continuously assess the risks to the inflation outlook emanating from high and volatile international crude prices, the continuing firmness in key food prices and uncertainties surrounding the evolution of demand-supply gaps globally, as well as in India.