The Asian Development Bank trimmed most of its 2011 and 2012 growth forecasts for the region while noting that Asia's emerging economies are showing resilience in the face of the darkening global environment.
Fundamentals including sound budgets and high reserves offer a buffer for emerging economies, but there is no room for complacency, the Manila-based ADB warned in the update of its Asian Development Outlook on Wednesday.
The update of the Development Outlook, which was released in April, includes increases in inflation forecasts for this year.
An easing of inflation pressures could be temporary if global growth picks up, and authorities have to be ready to resume tightening monetary policy. Volatility in capital flows will complicate policymaking, the ADB said.
Despite global woes, growth will remain healthy across the region, the ADB said. Developing Asia -- made up of 45 countries in Central Asia, East Asia, South Asia, Southeast Asia and the Pacific -- is expected to grow 7.5 percent in 2011 and 2012.
That is down from April forecasts of 7.8 and 7.7 percent respectively, and growth of 9.0 percent in 2010.
ADB President Haruhiko Kuroda noted the tentative recovery in major industrial economies earlier this year had been undermined by the ratings downgrade of the United States, Europe's debt problems and Japan's triple disaster in March.
Yet developing Asia's economies are continuing their steady growth, he said.
Although led by the People's Republic of China and India, momentum is felt across the whole region.
The ADB said China is expected to grow 9.3 percent in 2011 and 9.1 percent next year, compared with the April forecasts of 9.6 and 9.2 respectively. India is now likely to grow 7.9 percent and 8.3 percent - lower than forecasts made in April of 8.2 percent for this year and 8.8 percent for 2012.
In parts of Asia, inflation concerns have eased as commodity prices have come off their 2011 peaks and worries about the global economy have grown. But the ADB said the prices could spurt higher again.
Inflation across the region was forecast at 5.8 percent this year, compared with the April projection of 5.3 percent, while the outlook for 2012 was unchanged at 4.6 percent.
If commodity prices resume their climb and the current weakness in the global recovery turns out to be temporary, regional central banks will have to speed up the process of monetary tightening, especially where inflation is already high, the ADB said.
Many of Asia's central banks have paused their rate-hiking cycles as global uncertainties grow. China may put further tightening on hold after inflation abated somewhat in August while some analysts say India is expected to hike rates only once more by year-end as output growth falters.
The ADB said allowing some exchange rate appreciation could help contain inflation by lowering import prices, and that could be combined with temporary capital controls designed to curb unwanted hot money flows which have been preventing some policymakers from raising rates in the inflation fight.
With real interest rates having turned negative in several countries, more monetary tightening is necessary to control inflation both over the next 2 years and the medium term, when the global economy will regain momentum, the ADB said.
The outlook for capital flows was uncertain, according to the ADB. It said that while Asia's strong economies and higher interest rates attract capital, in times when risk aversion rises, investors tend to retreat to advanced economies, so policymakers needed to prepare for volatility.
Inflows to Asia have moderated as concerns over the global economy have grown this year, the ADB said.
There were two main concerns about a surge in short-term flows. First, cash flowing in can complicate efforts to cool economies, and can weaken the effectiveness of monetary policy. Second, inflows can be followed by a destabilizing reversal of cash.
Regional policy makers may therefore find it appropriate to use well-targeted measures to improve their financial supervision and regulatory rules, as the recent short-term flows are dominated by those coming through the banking channels, the ADB said.
(Reporting by John Mair; Editing by Richard Borsuk)