The recent financial stress in India has contributed to greater vulnerability of corporate and bank balance sheets and a further downward revision of growth forecasts, the IMF has said.
However, the overall impact of the financial crisis so far has been manageable in Asia although some countries have been subject to greater stress, the International Monetary Fund (IMF) said in a report released on Friday.
“In India, the fallout from recent financial stress has likely contributed to greater vulnerability of corporate and bank balance sheets and a further downward revision of growth forecasts, which were already very low in historical context,” the IMF said in its October 2013 update of the Asia and Pacific Economic Outlook report.
“This reflects persistent supply constraints and slow progress on structural reforms.”
“Despite weak demand, however, food prices will likely keep headline inflation close to double digits,” the IMF said.
According to the report, Asia has not been spared by the recent re-pricing of financial assets in emerging markets, encountering a wave of capital outflows in the past few months.
The overall impact has, so far, been manageable although some countries have been subject to greater stress, it said.
Tighter global liquidity — and home-grown structural impediments in some countries — will weigh on growth, but for most economies the impact should be partly offset by a gradual pick up in exports to advanced economies and resilient domestic demand, the IMF report said.
“If, however, conditions tighten further, we are likely to see even greater differentiation across the region,” it said.
Those with strong fundamentals and policy credibility will be able to offset import tightening through lower policy rates and fiscal support, it added.
Others that have delayed reforms, left fiscal vulnerabilities untackled or tolerated too-high inflation may be forced to respond with a pro-cyclical policy tightening.
“Announcing credible medium-term reforms would rebuild confidence and ease policy trade offs,” it said.
India and Indonesia have seen more concerted pressure and, to support their currencies, have responded with increases in policy rates, tightening liquidity conditions and, in India’s case, further opening up to capital inflows, the report added.