Emerging markets came under fresh attack with sharp depreciation in currencies of Argentia, Turkey, South Africa and Russia. Global equities and currencies reacted negatively to the fall of these currencies on risk aversion. The theme for 2014 could well be buy deveopled markets and sell emerging markets, a sharp reversal of trends seen in the 2000-2010 decade where emerging markets were bought aggressively on growth led factors.
The emerging markets witnessed volatility in the last week of January 2014 on announcements made by the Fed coupled with currency woes in most of the emerging market economies. The Turkish Lira, the Argentinian Peso, the Brazilian Real, the Russian Rouble and the South African Rand registered a decline in the value of their currencies on account of lax monetary policies adopted by central banks along with deteriorating economic conditions faced by the respective countries. Emerging market economies are seen to be grappled with widening current account deficits, rising inflation and increased investment outflows in the wake of mildly recovering developed economies.
At an emergency policy meeting on 28th January 2014 the Central Bank of Turkey decided to raise the benchmark repo rate to 10% from 4.5% and the overnight lending rate to 12% from 7.75% reversing years of policy rate cuts after the lira slid to a record lows. The Turkish Lira depreciated 8.8% to a low of TRY 2.34 per USD but saw respite following central bank measures to end 5.58% down at TRY 2.27 per USD since 30th December 2013.
The Argentinian Peso depreciated from ARS 6.54 per USD to ARS 8 per USD after which the Central Bank of Argentina intervened to stem the fall that saw a depletion in the currency reserves by USD 2.1 billion. Foreign reserves, crucial to service foreign debts and pay for needed imports like fuels, have tumbled from USD 52 billion at the beginning of 2011 to USD 28.5 billion as of January 30th 2014 according to Central Bank data.
The South African Rand depreciated 6.67%, the Russian Ruble depreciated 6.08% and the Brazilian Real depreciated 0.83% on a month on month basis. The central banks of the respective countries intervened in the foreign exchange market to stem the fall in the value of their currencies. Central Bank intervention saw marginal appreciation in the value of the currencies after the fall of 7.8% for the South African Rand to ZAR 11.32 per USD, 6.81% for the Russian Ruble to RUB 35.09 per USD and 2.09% for Brazilian Real to BRL 2.44 per USD in the month of January 2014. The South African central bank raised borrowing rates by 50 basis points to 5.5 per cent following the move by the Central Bank of Turkey.
The Federal Reserve announced further taper in the stimulus in the form of reduction in bond purchases in January 2014. The Fed cut its bond purchase program of USD 75 billion by USD 10 billion in its January 2014 meet and indicated that it will continue to taper asset purchases by USD 10 billion in every meet. The interest rates are however slated to stay close to zero per cent as long as inflation expectations do not rise above 0.5% over the threshold level of 2% and unemployment rate is above 6.5% for the US economy. The announcement came in prior to the Real GDP growth data that was reported at 3.2% for the fourth quarter of 2013 for the US economy. The economy grew at 1.9% in the year 2013 over a 2.8% growth that was reported in the year 2012. Jobless claims were reported at 348,000 for the week ended January 26th 2014 as against revised claims of 3,29,000 for the week ended previous to last. The Dow Jones Industrial Average and the NASDAQ declined 4% and 0.58% in the last month. The markets reaction to the Fed taper was a fall in equity indices across the globe while US treasury yields fell and the USD strengthened against emerging currencies.
The RBI increased the repo rate by 25 basis points (bps) from 7.75% to 8% in the quarterly monetary policy that was scheduled in January 2014. The rate hike was announced post the release of the Dr. Urjit Patel Committee report on Revision and Strengthening of the Monetary Policy Framework in India. The Sensex and the Nifty declined 3.05% and 3.45% respectively in the last one month after reaching an all time record high levels in the month of January 2014.