“Although this would not originate in emerging markets, when you have a market that is reducing exposure to risk, emerging market flows are affected. And India will also be affected in this scenario,” he said.
The warning comes as the IMF flags rising sovereign bond yields, potential corrections in AI-driven equity markets and cybersecurity threats as interconnected risks to global financial stability.
Vamvakidis said rising sovereign bond yields were the immediate concern. A further increase could trigger an equity market correction, including in AI stocks, with wider implications for bonds, credit markets and the real economy.
On the possibility of an AI bubble, he said valuations were not currently stretched because earnings remained strong. However, any disappointment in corporate earnings could put valuations under pressure and trigger a sell-off.
For India, another potential risk lies in AI’s implications for traditional technology services, software and back-office operations, sectors in which the country has built considerable strength.
“The second channel, some of which we are already seeing, is market concerns that AI could have negative implications in the previous part of technology, software, for example, back office operations, logistics, where India has been particularly strong,” Vamvakidis said.
However, he cautioned against drawing firm conclusions about the eventual impact. Market reactions to concerns about AI disruption had sometimes been excessive, and the IMF was not yet seeing a corresponding impact in real-economy data, he said.
“Nobody knows how this exactly will play out,” he added, emphasising that India’s human capital and technology-related skills remained important economic strengths.
Vamvakidis also urged India and other emerging economies to strengthen their fiscal and external balances to withstand future shocks. Despite improved fundamentals, he said, policy buffers remained thin globally, making preparedness essential if market sentiment deteriorated.