IMF: Emerging Markets Show Resilience to Global Shocks Due to Stronger Domestic Debt Markets
SDG 8: Decent Work & Economic Growth | SDG 17: Partnerships & Finance
Institutions: Ministry of Finance | Reserve Bank of India
The IMF Global Financial Stability Report (GFSR), October 2025, Chapter 3: Global Shocks, Local Markets, finds that Emerging Market (EM) economies have demonstrated greater resilience to global “risk-off” shocks, characterized by smaller capital outflows and more contained borrowing costs. This stability stems primarily from improved domestic policy frameworks, including stronger monetary policy implementation and enhanced central bank credibility, which have led to lower inflation and smaller output losses.
Crucially, the deepening of local currency bond markets and greater domestic ownership of sovereign debt have played a critical role in insulating EM debt from global turbulence and reducing the risk of currency mismatches. Analysis shows that higher domestic ownership significantly mitigates the rise in local currency yield spreads during a shock.
However, the report cautions that risks persist due to eroded fiscal space, and the growing reliance on domestic banks to hold sovereign debt could potentially crowd out private sector lending or expose the banking sector to large losses during a sovereign default.
These findings validate the need for Indian financial policymakers to continue prioritizing the deepening of domestic bond markets and strengthening central bank credibility as the primary defense mechanism against global financial volatility.
What is Emerging Market (EM) Resilience? → These are fast-growing economies (e.g., India, Brazil) that used to panic whenever rich countries (like the US or Europe) had a financial scare. Now, they are “resilient,” meaning they can handle the scares without their own economy collapsing.
Emerging markets’ stability can be understood through an example → imagine an Emerging Market is a house, and global money is the weather.
The Good News: Built-in Protection: In the past, when a “risk-off shock” (a financial storm) hit, investors would yank their money out (like a giant windstorm tearing the roof off). Now, EMs are much stronger. They have better walls (”good policies”) and a foundation built on local money (”local currency bond markets”). This local foundation means when foreign investors leave, the local financial system barely budges.
The Key to Resilience: The secret is local investment. Because more of the country’s debt is owned by its own banks and citizens, the government doesn’t have to worry as much when outside money flees. This stability keeps borrowing costs down and protects the currency.
The Warning (The Catch): The report warns of a trade-off. While it’s great that local banks are buying all that government debt, policymakers must be careful. If the banks buy too much government debt, they may:
Not have enough money left to lend to new businesses, slowing down economic growth (crowding out).
Be at risk if the government ever struggles to pay its own debts (a sovereign default).
In short: Local funding has made EMs tougher, but leaders must balance national debt needs with the private economy’s need for cash.
Follow the full report here: IMF GFSR Oct 2025, Chapter 3 Summary: Global Shocks, Local Markets: The Changing Landscape of Emerging Market Sovereign Debt