Emerging market risk: meaning, types and what it means for India

India is classed as an emerging market. That brings growth potential, but also extra risks compared with developed markets like the US or Europe. This page explains what emerging market risk means, its main types and how it affects Indian investors.

Quick answer

Emerging market risk is the set of extra risks that come with investing in developing economies. These include sharper currency moves, sudden outflows of foreign money, political and policy changes, weaker institutions and lower liquidity. Because global investors often treat emerging markets as one group, trouble in one country or a change in US rates can affect all of them at once.

Key takeaways

• It covers the extra risks of developing economies.
• Currency swings and foreign outflows are major parts of it.
• US interest rates and the dollar strongly affect these markets.
• Global investors often sell emerging markets together.
• India is part of the MSCI Emerging Markets Index.

What is an emerging market?

An emerging market is a country that is growing fast and building its financial markets, but has not yet reached the income levels or market depth of developed countries. India, China, Brazil, Indonesia and South Africa are common examples.

Index providers like MSCI and FTSE classify countries based on economic size, market openness and ease of investing. India is part of the widely tracked MSCI Emerging Markets Index.

Main types of emerging market risk

These risks are linked. When foreign investors sell, the currency usually falls, which can push more investors to sell. This cycle can cause sharp moves in a short time.

Why US rates matter so much

When US interest rates rise or the dollar strengthens, safer US assets become more attractive. Money often flows out of emerging markets back to the US. In 2013, when the US Federal Reserve signalled it would slow its bond buying, many emerging markets saw sharp falls in currencies and bonds. This was called the 'taper tantrum'.

India was among the countries affected then. Since that time, India has built much larger foreign exchange reserves, which helps it handle such shocks better.

What it means for Indian investors

Even if Indian companies are doing well, global events can move Indian markets through foreign portfolio flows. Watching US Fed decisions, the dollar index and global risk mood helps explain some of the day-to-day moves in Indian shares and the rupee.

Domestic investors, through SIPs and mutual funds, now provide steady support to Indian markets. This has made markets less dependent on foreign money than before, though foreign flows still matter.

The key point to remember

Emerging market risk is the price of investing in faster-growing but less mature economies. It brings sharper swings, and understanding its sources can help you stay calm when global events shake markets.

The securities and commodities named here are mentioned only to explain how the market works and are not a recommendation to buy, sell or hold them.

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