India’s currency cartwheeled to historic lows yesterday, while markets in Indonesia took a spill, evidence of how rising US yields are making it harder for emerging nations to fund their current account deficits.
The turbulence heightened investor caution ahead of the release tomorrow of the minutes of the US Federal Reserve’s last policy meeting, with many fearing they might only add to the confusion about when it might scale back stimulus.
The Indian rupee slid as far as 62.50 per US dollar, breaching the previous low of 62.03. The stock market lost 1.4 percent, on top of a 4 percent drubbing on Friday last week.
The currency has been hurt by investor frustration at the slow pace of economic reform in India, which has made it harder for the country to finance its hefty current account shortfall.
The Reserve Bank of India has tried to restrict how much Indian residents and companies can send offshore, but that only raised fears of outright capital controls that would further undermine the confidence of foreign investors.
“The foreign investor community wants tangible and ambitious reforms that look and feel like a worthy ‘second generation’ to the fundamental measures adopted in the early 1990s,” Westpac analysts said in a note.
They also found it “curious” that the Reserve Bank of India would be fighting against a depreciation in the rupee given that it would help boost exports and limit imports over time.
Meanwhile, Indonesia’s rupiah shed 0.9 percent to four-year lows at 10,475 per US dollar, with the equity and bond markets weakening in the wake of data showing a sharp widening in the nation’s current account deficit.
The US dollar has been in gradual decline for the past six weeks or so, in part on concerns the prospect of Fed tapering would scare foreign investors out of US bonds.
“We continue to believe that tapering will begin at the meeting next month and, hence, support the US dollar, especially against high-yielding currencies,” analysts at Barclays said in a note.
However, they added there was a chance the Fed may have begun discussing lowering its threshold rate for unemployment as a way to convince investors that rates will remain near zero for a long time to come.
“Any discussion in this regard is likely to be viewed as a dovish surprise by the market and lead to a near-term rally in the belly of the Treasury curve,” Barclays said.