The uncertainty over transition of the US monetary policy to normalcy could set off volatility in capital flows to emerging economies, but India is better-positioned to weather these challenges, Moody’s Investors Service said.

Moody’s Investors Service VP and Senior Research Analyst Rahul Ghosh said that besides the Fed rate action, a slowdown in the Chinese economy and falling commodity prices are other major global developments that could impact emerging markets.

“India appears less exposed than other similarly-rated emerging market sovereigns, given its small current account deficit and relatively low external debt as a share of nominal GDP,” said Ghosh.

The US Federal Reserve had last night hiked interest rates by 0.25 per cent. This is the first hike in about a decade, a hint that the US economy is on mend.

The US central bank has said it is likely to proceed gradually in normalising the interest rates, although future policy actions will depend on how the economy evolves relative to its objectives of maximum employment and two per cent inflation.

“With regard to the US monetary policy, the narrative will now shift from lift-off to the future rate trajectory. We expect further interest rate rises in the US to be very gradual,” Ghosh said. He projected the rates to go up by 1.5-2 per cent in the next two years.

“The uncertainty over the transition back to monetary normalcy could still provoke some volatility in capital flows into emerging markets… India appears better-positioned to weather these challenges,” he said.

Ghosh said the countries with limited buffers and policy space will remain most at risk to adverse capital flows and investor sentiment. The most affected large emerging markets have tended to be Brazil, Russia, Turkey and South Africa.