Emerging market policymakers who have in recent times tightened monetary conditions in an effort to shore up their currencies, may be digging themselves into a hole, economists have warned.
Brazil, Indonesia and most recently India have tightened monetary policy in the face of rapid currency depreciation stemming from worries over the Federal Reserve scaling back its extraordinary monetary stimulus.
But there are concerns that the moves will do little to support currencies with economic growth suffering as a result.
"If you want to keep capital onshore, raising rates is one way to attempt to do that. But under these circumstances of U.S. monetary tightening, I think it's useless," said Uwe Parpart, chief strategist and head of research, Reorient Financial Markets told CNBC.
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"Once the outflows start, policymakers can raise rates all they want, but they are just going to make the economic situation worse and outflows will accelerate. I don't understand the thinking of central bankers, this is a measure of desperation which is not well thought out," he added.
The Brazilian real, Indonesian rupiah and Indian rupee have declined 10 percent, 3 percent and 7.2 percent, respectively, against the U.S. dollar since Fed Chairman Ben Bernanke started talking about tapering on May 22. These currencies have been vulnerable to heavy selling given worries about their large current account deficits.
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Despite aggressive intervention by the Brazilian Central Bank, the real has so far failed to respond to the tightening policies. The central bank has raised its benchmark rate by 125 basis points since April.
"The failure of the Brazilian real to rally in response to monetary policy tightening is disturbing. It is a bad sign for an emerging market currency when the central bank tightens policy and the currency depreciates sharply. It can signal a lack of faith in policy credibility," said Nicholas Ferres, investment director at Eastspring Investments.