Heavily borrowing Indian firms vulnerable to strong dollar: Lagarde

Noting challenges posed by the recent strengthening of the US currency, International Monetary Fund Managing Director Christine Lagarde on Tuesday said Indian companies which borrowed heavily in foreign currency are vulnerable to the strong dollar.

"India's corporate sector, which has borrowed heavily in foreign currency, is not immune to this vulnerability. Corporate sector debt has risen very rapidly, nearly doubling in the last 5 years to about $120 billion," Lagarde said in her address at the Reserve Bank of India here seated alongside RBI Governor Raghuram Rajan.

A strong US dollar combined with the divergence of monetary policy paths in advanced economies has put pressure on countries whose exchange rate regimes are linked to the dollar but yet conduct a substantial share of their external trade in other currencies, she added.

The added challenge of unconventional monetary policies, including large purchases of government debt, have had both positive and negative spillovers in that these helped avoid a financial market meltdown in the initial stages and later supported a recovery, the IMF chief said.

Ahead of the US Federal Reserve's meeting on Tuesday, Lagarde said that emerging markets like India must prepare for the impact of a rise in US interest rates.

"The danger is that vulnerabilities that build up during a period of very accomodative monetary policy can unwind suddenly when such policy is reversed, creating substantial market volatility," she added.

Reminding the audience of the so-called "taper tantrum" provoking capital flight from emerging markets in 2013, when the US hinted at reducing its $85 billion-a-month bond purchase programme, Lagarde praised Rajan's deft handling of the crisis spillover in India.