Rupee blow as emerging markets hit by turmoil

The 20 biggest emerging market currencies tumbled against the US dollar yesterday with India’s rupee particularly badly hit amid mounting market turmoil in the developing world.

The rupee slumped to an all-time low against the backdrop of deepening concerns over the government’s economic management. The 2.4 per cent fall to a record 63.2 to the dollar took the currency’s slump against the dollar this year to 12 per cent.

Yesterday's moves in India came alongside grim news from emerging economies and further evidence of how the US Federal Reserve's plan to end its monetary stimulus has continued to hit stocks, bonds and currencies across the developing world.

Over the past six months, China’s heavily managed renminbi is the only major emerging market currency to have managed to hold its ground against a resurgent dollar.

Fears over the impact of the Fed’s plans to scale down its bond purchases have been compounded by slowing economic growth and deteriorating fiscal fundamentals in many countries. Investors are particularly concerned over states with current account deficits that have been plugged by inflows of flightier investor capital, rather than foreign direct investment.

"It's the current account deficit countries that are in the most trouble," said Angus Halkett, a bond fund manager at Stone Harbor Investment Partners. "The market is becoming a lot choosier where it puts its money, and some countries are going to find it tough."

Indonesia underlined that as its main equities index fell by some 5.6 per cent after the country's central bank reported on Friday that its current account deficit had widened sharply in the second quarter of this year.

Data yesterday showed how the growth equation is changing for emerging economies, with Thailand’s economy slipping into a technical recession due to weak exports and sluggish domestic demand.

But India remains the biggest concern for many investors, with pessimism driven by questions over the government’s economic management.

Only Brazil’s real and South Africa’s rand have recorded bigger declines than the rupee in 2013. India’s benchmark Sensex share index fell by nearly 2 per cent while 10-year bond yields pushed above 9 per cent, their highest level since the 2008 financial crisis.

The burgeoning crisis in India has also become political, with senior opposition figures declaring the only way out was early elections, now due by May 2014. – Copyright The Financial Times Limited 2013