The tightening of monetary policies by the US at a time when other countries are easing theirs could make emerging economies "vulnerable" as many of their firms and banks have sharply increased their borrowings in dollars in the last five years, the IMF Chief Christine Lagarde warned on Sunday.
Speaking at the opening of China Development Forum in Beijing, Christine Lagarde said, "The world has yet to achieve full economic recovery as global growth continues to be weighed down by high debt, high unemployment and lacklustre investment".
Referring to International Monetary Fund's (IMF) recent forecast to cut global growth to 3.5 per cent and 3.7 per cent in 2015 and 2016 despite the boost from cheaper oil and stronger US growth, she said the global recovery remained fragile because of significant risks.
"One such risk emanates from the expected tightening or normalisation of US monetary policy at a time when many other countries are 'easing' monetary conditions," she said on the US' plans to raise interest rates.
"This asynchronous monetary policy may trigger excessive volatility in global financial markets. The divergence of monetary policy paths has already led to a significant strengthening of the US dollar.
"Emerging markets could be vulnerable, because many of their banks and companies have sharply increased their borrowing in dollars over the past five years," Lagarde who was in India last week said.
Stating that some of the unconventional monetary policies, including large purchases of government debt, had strong, positive spillovers on the global economy after the 2007 economic crisis, she said those policies prevented a financial market meltdown and supported the recovery in advanced economies and beyond.
"I am convinced that, without these unconventional tools, the world would have sunk into a 1930s-style depression," she said.
"Unconventional monetary policies have also led to negative spillover effects on emerging markets through a build-up of financial stability risk. These policies triggered huge capital inflows into emerging financial markets.
The IMF chief said that between 2009 and the end of 2012, emerging markets received $4.5 trillion of gross capital inflows, representing about half of global capital flows during that period.
"This led to a significant increase in bond and equity prices and to a strengthening of emerging market currencies.
IMF studies suggest that these effects were larger than the ones that had been caused by conventional policies in the past," she said.
"These spillovers pose a risk to financial stability in emerging markets, because policy changes could easily lead to a sudden reversal of capital flows", she said.