An international debate over the causes and consequences of the sell-off in emerging markets (EMs) is heating up, with the policies of the U.S.Federal Reserve coming in for sharp criticism.
On February 6, Indonesia's finance minister,Chatib Basri, joined Raguhram Rajan, India's central bank governor, in criticizing the Fed for not properly co-ordinating its monetary policies with EM governments and central banks, claiming "the uncertainty regarding tapering is still there".
Yet the withdrawal of monetary stimulus by the Fed is just one of several focal points for market anxiety. China's attempts to tame its credit boom are as much - if not more - of a concern to investors.
The elephant in the room, however, is EM monetary policy itself which, as last month's extremely aggressive interest rate hikes by Turkey's central bank showed, is raising more questions than answers.
(Read more: Turkey delivers massive rate hike to defend lira)
As the euro zone crisis has made clear - and earlier financial crises for that matter, notably the UK government's ill-fated attempt in 1992 to keep sterling in Europe's Exchange Rate Mechanism (ERM) - credibility is all when it comes to central banks' efforts to fight off speculative attacks.
While Turkey's central bank had little choice but to hike rates in a dramatic fashion given the country's high inflation rate and the sharp slide in the lira, the announcement of a staggering 425 basis point increase in the main policy rate at the stroke of midnight on January 28 hardly inspires confidence.
Quite the opposite - it smacks of panic.
The striking shift in Turkish monetary policy unsettled markets further, helped spark a new leg in the EM sell-off and exerted peer pressure on central banks in other vulnerable countries to hike rates.
Indeed, the day after Turkey's "midnight hike",South Africa's central bank - which also contends with high inflation and a wilting currency - surprised investors with an earlier-than-expected 50 basis point rate increase.
(Read more: Turkey: What's going on and why you should care)
Markets are now pricing in heftier rate hikes in a number of EMs over the next year or so, even in countries where inflation remains subdued, such as Hungary and Poland.
This should set off alarm bells.
Sentiment towards EMs, particularly the more vulnerable ones, is still bleak. What's more, the latest round of rate hikes is throwing the political and economic challenges confronting EMs into sharper relief.
Markets are likely to start fretting a lot more about the weakness of growth, particularly given mounting concerns about the credibility of the policy making regime in many developing economies.
The only central bank of a vulnerable EM which has been able to restore credibility in the eyes of investors is India's. This has a lot to do with the reputation and personality of Rajan who has made it crystal clear that his overriding priority is to bring down India's dangerously high inflation rate.
Yet the politics of Indian monetary policy are likely to become more difficult given the pressures to revive the country's flagging growth - not least with a closely watched parliamentary election just three months away.
The big risk is that EM central banks are forced to tighten monetary policy excessively because governments are failing to restore confidence in economies.
Strong growth has been EMs' most prized commodity. In order not to put this further at risk, governments need to press ahead with structural reforms and central banks need to pursue sensible and credible monetary policy.
Indeed,U.S. ratings agency Standard & Poor's reflected these concerns when it revised its outlook on Turkey to negative on the lack of the country's governance.
Let's hope that Turkey's "midnight hike" is not a foretaste of things to come.
Nicholas Spiro is Managing Director of Spiro Sovereign Strategy