Photo: Mint (Mint)
Photo: Mint
(Mint)

Emerging markets all in the same boat

Little to choose between India and other major emerging markets, especially those with a current account deficit

Mumbai: The gloom and doom surrounding the financial markets is not exclusive to India. There is little to choose between the country and other major emerging markets, especially those running a current account deficit. Even if some countries are better than their peers on certain parameters, they lose out on other metrics.

Despite a sharp decline recently, Indian equities have been relatively resilient. The MSCI India index has shed about 10% since mid-May, when the US Fed first talked about winding down its monetary stimulus, against a 22.6% fall for Turkey and 20.9% for South Africa.

Similarly, India is not the only country to resort to tightening measures to defend the currency. After the overnight move by the Reserve Bank of India (RBI) to prevent a sharp rise in long-term yields, the increase in 10-year bond rates since mid-May is only 95 basis points, among the lowest. In contrast, Indonesian bond rates have risen by almost three percentage points. (A basis point is one-hundredth of a percentage point.)

That, despite India easily having the highest rates of consumer price inflation.

Central bank interventions also mean that India’s forex reserves have seen a 4.6% erosion since mid-May, surpassed only by Indonesia’s 11.9%.

The sharp fall in the local currency is the main cause of nervousness for investors in bond and equity markets in India. Despite its best intentions, RBI has failed to stabilize or brake the fall of the rupee.

“Juggling currency and growth concerns at the same time is not easy and if not done carefully it risks sending mixed messages about policy intentions," writes Leif Eskesen, chief economist for India and Asean at HSBC Holdings Plc., in a 21 August note.

As can be seen from the data, global financial events have dictated the course of emerging market stocks, bonds and currencies. It is likely to remain so in the near future.

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