US policy decision sends panic through the emerging markets

It followed a slide on Friday in Brazil’s real, a currency that, like the rupee, has been hammered by investor doubts that actions taken by monetary authorities last week will prove effective in stemming the sell-off.

“Our primary concern is that the policy authorities still don’t ‘get it’ – thinking this is a fairly minor squall which will simmer down relatively quickly with fairly minor actions,” Robert Prior-Wandesforde, an economist at Credit Suisse, wrote in a note on the Indian currency yesterday.

Growing expectations the US Federal Reserve will start scaling back its bond purchases as early as next month, slowing the flow of cheap money into higher yielding overseas assets, have weighed on many emerging markets.

The currencies of countries already struggling with wide current account deficits, such as India and Indonesia, are seen as among the most vulnerable to sudden capital flight and have been hit hardest.

India’s tumbling currency has been the worst performer in Asia since the Fed first signalled that it may begin “tapering” its monetary stimulus this year.

Indian policymakers are grappling with a record current account deficit at 4.8 per cent of GDP –- and market participants aren’t convinced the government can reduce the gap to a targeted 3.7 per cent this financial year.

The Reserve Bank of India has been selling dollars to support the rupee and last week announced curbs on outflows from companies and individuals, denting stock and bond markets.

Brazil’s central bank has also intervened to try and reassure investors, but could not prevent the real from sinking to its lowest level since 2009.