Moody's Investors Service on Tuesday said the likely interest rate hike by the US Federal Reserve this week could pose risks to some emerging markets.
It said the sovereigns having little policy room to protect growth and buffer themselves from external shocks are likely to be affected the most.
The report titled Sovereigns -- Global: Likely Fed Rate Hike Reflects Strength of US Recovery, But Exposes Some EM Sovereigns to Volatile Capital Flows, projected the US Federal Reserve to hike rates by 0.25 per cent on Wednesday.
"While a Fed rate hike would remove an element of uncertainty for emerging market sovereigns, some will remain at risk to adverse capital flows and investor sentiment.
“For example, there is a low risk of a disorderly reaction should investors abruptly adjust their expectations for yields," it said.
However, downside risks will remain for some emerging markets depending on the degree of exposure to rising US interest rates.
The report, however, did not specify the impact, the rate hike will have on India.
"Those possessing limited buffers and policy space will remain most at risk to adverse capital flows and investor sentiment.
“The big drops in emerging market exchange rates already seen this year were partly in anticipation of a Fed action," Moody's said.
Although lower global commodity prices and possible volatility in capital flows will pose challenges to some emerging markets, a combination of reserve buffers and policy vigilance has the capacity to limit the negative sovereign credit impact.
"The most affected large emerging markets -- and those most at risk going forward -- have tended to be those such as Brazil, Russia, Turkey and to some extent South Africa, where severe domestic challenges have contributed to exchange rate and financial market instability, and where policy room to buffer external shocks and protect growth is less robust," Moody's said.
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