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Indian rupee tumbles to record low in GEM turmoil
by Dylan Lobo on Aug 20, 2013 at 08:27
Concerns over an Indian economic crisis sent the rupee sliding to an all-time low as emerging markets suffered their worst trading day in six weeks.
These fears, which have been exacerbated by signs quantitative easing in the US is drawing to a close, saw the rupee slide by 2.4% overnight to 63.2 against the dollar. The currency has fallen by 12% this year.
Other currencies were also feeling the heat with the Indonesian rupiah touching its lowest level since 2009 against the dollar and Brazil’s real hitting its lowest level since March 2009.
India’s benchmark Sensex index lost 2%, while the yield on the nation’s 10-year bonds hit 9%, their highest level since the 2008 financial crisis. Meanwhile Indonesia’s Jakarta index fell by 5.6%, it's largest fall since October 2011.
A separate report showing Thailand had fallen into a technical recession increased the pressure on emerging markets and sent the nation's SET index plunging to a one-month low.
These factors combined to drag the MSCI Emerging Markets index 1.4% lower at 944.88, with all 10 sectors in the index falling. At the same time the Chicago Board Options Exchange Emerging Markets ETF Volatility Index rose 4% to 24.57 in anticipation of more turbulence in emerging markets.
However, it is India which is giving investors the biggest reason to fret. GDP growth in the country has halved in the last two years to 5% after the government failed to introduce suitable growth measures while keeping a reign on inflation.
Data last week underlined the country’s predicament. Industrial output contracted for a second consecutive month in June, while food inflation shot up in July.
The inflationary pressures forced the Bank of India to keep interest rates at 6.5%, which analysts believe is weighing on growth.
GAM’s Charles Hepworth believes it is best to stay clear of emerging markets during QE tapering. ‘While the medium term outlook remains intact, some headwinds have developed, most notably the market’s incorrect hypothesis that capital will leave these areas following QE tapering, Hepworth said. ‘The preference is to avoid short term volatility while we await better entry points.’
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