Emerging markets must prepare for U.S. rate hike - IMF's Lagarde

By Suvashree Choudhury and Neha Dasgupta

MUMBAI (Reuters) - Emerging markets need to be prepared for the impact of a rise in U.S. interest rates which could still surprise in both timing and pace, the head of the International Monetary Fund, Christine Lagarde, said on Tuesday.

In a speech in Mumbai, Lagarde warned that there could be a repeat of the so-called "taper tantrum" seen in 2013 when then Federal Reserve Chairman Ben Bernanke's mere mention of trimming the Fed's bond purchase programme was met with a global market selloff.

"The danger is that vulnerabilities that build up during a period of very accommodative monetary policy can unwind suddenly when such policy is reversed, creating substantial market volatility," Lagarde said in the speech at the Reserve Bank of India.

"We already got a taste of it during the taper tantrum ... I am afraid this may not be a one-off episode. This is so, because the timing of interest rate lift-off and the pace of subsequent rate increases can still surprise markets."

Advanced economies could help reduce the risk of market volatility by communicating policy intentions clearly. However, emerging markets that had tackled economic vulnerabilities had fared better when shockwaves hit in 2013, she said.

"In particular, higher GDP growth, stronger external current account positions, lower inflation and more liquid financial markets helped dampen market volatility," Lagarde said, adding that a more resilient financial services sector would help.

India was pursuing reforms that were "timely, but will also need to be pursued with the utmost speed", she said.

Lagarde said central banks should also stand ready to act, with both liquidity support and targeted foreign exchange interventions.

She justified the right of major central banks to engage in unconventional monetary policies, saying they were not "supposed to last forever."

"They are of a temporary nature, and they were clearly intended by all those who articulated their vision about unconventional monetary policies to deal with specific issues and particular circumstances," she said during a question-and-answer session after the speech.

Lagarde also described cooperation among central banks on their unconventional monetary policies as "solid and frequent so that there can be good anticipation, good preparation, by those who will be suffering or receiving the spillover effect."

India's central bank governor, Raghuram Rajan, however, said cooperation between central banks globally required more action.

"My sense is appetite for global cooperation is smaller than one might wish," he noted. "We hope that when push comes to shove cooperation would emerge."

India has unexpectedly cut interest rates twice this year at unscheduled meetings. In a statement announcing its latest cut on March 4 the RBI said the possible spillover of volatility from international financial markets was a "significant risk".

(Additional reporting by Rafael Nam and Swati Bhat; Writing by Clara Ferreira Marques and Suvashree Dey Choudhury; Editing by Susan Fenton)