Foreign capital outflow a trend in emerging markets these days.

The ringgit, which has been described as being in a tight spot, has fallen 6.6% since May 22, when the Fed first raised the spectre of an early stimulus withdrawal, reports the Singapore Business Times. The ringgit has been trading at three-year lows against the US dollar, and month-long selling has pushed 10-year Malaysian government bond yields to their highest in 2½ years, says the report. The reason is “an exodus of foreign capital, as investors reassess emerging markets most at risk from a withdrawal of US easy money policy,” it adds. The Indian rupee has dropped more severely by 8.5% since May 22. India has been described as being “caught in the middle”, as the United States ponders tapering off its quantitative easing policy, causing volatility in emerging markets, as investors pull money out. India was enjoying a growth rate of 9% just two years ago. Now, the Reserve Bank of India is forecasting growth at 5.5% for the fiscal year ending next March, says the SBT. Reliance on foreign capital has always been a dangerous game, and the authorities are well aware of that. In some quarters, it is a known fact that foreign capital is not really welcome, as it wreaks havoc with its large movements. Economies in South-East Asia, especially, have to be very cautious of foreign capital, as the impact can be severe once they withdraw their funds. Fund flows are usually tracked by central banks, which will have an indication of the inflows and outflows. The economy itself should be fundamentlly strong and able to withstand the shock of any outflow. High economic growth is not really the objective in this case, but rather steady, resilient and broad-based growth. Investors in emerging markets should be prepared for such a phenomenon and get ready with their asset allocation strategies.

The Star News