Abu Dhabi: Despite Indonesia, Turkey and India having all tightened monetary policy over the past couple of months and Brazil raising interest rates, it’s doubtful that the sell-off of emerging market currencies will trigger a wave of rate hikes elsewhere in the emerging world, a study by the London-based research firm, Capital Economics says.

“Lingering fears over the impact of a tapering of asset purchases by the US Fed have seen emerging market currencies continue to weaken over the past month — countries with current account deficits have been among the hardest hit. [However], output indicators suggest that GDP growth in the emerging world remains weak. Emerging Asia is feeling the effects of the slowdown in China. External indicators show no sign of an imminent recovery in emerging market exports [and] financial markets have been mixed over the past month,” Capital Economics said in a report.

It added: “Looking ahead, we expect emerging markets’ industrial growth to remain sluggish. The larger BRIC economies continue to suffer, with the weakness here starting to spread to the smaller emerging markets. Inflation remains subdued across much of the emerging world.”

Commenting on the report, Gaurav Kashyap, Head of Futures at Alpari ME, a currency brokerage based in Dubai told Gulf News: “Despite the Indian Rupee going through a torrid time the past few months, it’s highly unlikely we will see any policy changes the next time the Reseve Bank of India convenes on July 30th. Amidst slowing growth & lower inflation the RBI will keep rates unchanged.”

Indirect steps

Kashyap said the RBI took some indirect steps in the week gone by, raising short term borrowing costs of its member banks as well as imposing caps and restrictions to speculative currency positions — and although providing short term relief, the Indian Rupee has pared all those gains.

“Therefore when the meet, we will look for alternative measures, as opposed to an all out rate hike. The situation in India is very different from Indonesia – growth in Indonesia still remains higher with inflation also stubbornly higher. We expect the dollar rally to pick up steam going into August, and all talks of a taper are premature at this moment. July & August’s NFP figures will be key in establishing future Fed policy and we would need to see modest declines in the overall unemployment rate with the participation rate also expected to show increases as well,” he added.

“Looking forward, we expect the weakness in emerging market currencies to continue with the dollar remaining in demand, and US equities also coming under some pressure,” said Kashyap.

Meanwhile, the Indian rupee gained on Friday after the central bank was rumoured intervening late in the session to support a currency that had floundered and been on the verge of wiping out all gains since policymakers’

Measures to drain liquidity.

The currency gained 0.3 per cent for the week, marking its second consecutive weekly gain, even as traders said the RBI’s measures to raise short-term interest rates to support the rupee unveiled late on Monday have not yet had a meaningful impact.

Concerns have risen about the success of the steps after the government cancelled a treasury bill sale and the central bank had to reject most bids at a special bond sale as investors demanded higher yields.