Fed taper looms over emerging market disorder

EMERGING markets took another hit yesterday, with fears that this week’s minutes from the Federal Reserve will hint at the beginning of a reduction in the country’s quantitative easing programme.

India’s rupee plummeted to an historical low of 62.73 to the dollar, and the country’s stock exchange fell by 1.69 per cent. Indian ten-year bond yields roared ahead, past nine per cent, up two percentage points since May.

Analysts suggest that as the Fed claws back its huge programme of monetary stimulus, and US bond yields rise, institutional investors who had moved to emerging markets will begin to withdraw.

American 10-year treasury yields hit a two-year high yesterday, rising to 2.87 per cent, from lows of less than 1.6 per cent when the Fed’s extension of QE was announced in September.

According to ratings agency Fitch’s survey of fixed income investors, though 73 per cent trust central banks to tighten policy without threatening recovery, two thirds are concerned about the effect of tapering on liquidity in emerging markets.