Lawmakers and central bankers in India, Indonesia, Turkey and several emerging-market economies are scrambling to contain the damage from falling currencies and to keep foreign investors from heading for the exits.
Money has poured out of those economies over the last few weeks, pushing down the prices of a wide array of assets, including stocks, bonds and currencies. On Tuesday, the Indian rupee fell to a record low against the dollar, while the Indonesian rupiah dropped to its lowest level against the dollar since 2009.
In an effort to slow the exodus of foreign money from Turkey, the countrys central bank raised a key interest rate Tuesday. That came as the Reserve Bank of India announced that it would start buying Indian government bonds later this week to address the risks to macroeconomic stability.
At this point in time I personally see the current government is completely in panic, said Arvind Singhal, the chairman of Technopak Advisors, a consulting firm in Delhi.
A booming U.S. stock market has been a magnet for investors who might have otherwise invested in overseas stocks. More important, the U.S. economic recovery is causing the Federal Reserve to reconsider the need for the stimulus measures that have fueled the boom in places like India and Turkey.
Many of these nations fueled their economic growth with an unprecedented flow of money from foreign investors. Those investors, in turn, were encouraged by the low-interest-rate policies of the Fed, which made it easy to borrow money and send it abroad.
Last year, $1.2 trillion poured into emerging economies from around the world, nearly six times the amount going in a decade ago, according to a report out Tuesday from HSBC.
As the Fed is taking the first steps toward letting rates rise in the United States, investors are pulling back their money. As they do, the local economies worsen, setting off a self-perpetuating cycle of market drops. Mutual funds that hold emerging market bonds, for example, have seen investors pull out money every week since May, according to the data firm EPFR.
The most acute problems in the emerging markets began in May, when Ben Bernanke, the Fed chairman, gave the first signals that the Fed might begin trimming back the bond purchases it had been making to support the economy. Since then, a wide array of global assets have moved in tandem with forecasts of how soon the Fed might slow the bond purchases.
The fear that Indonesia may not be able to continue attracting that money helped push the main stock index in Jakarta down 3.2 percent Tuesday. Over the last month, the index has dropped 11.6 percent.
The most urgent fears have centered on India, where the economy is more than twice as large as Indonesias, and where the current account deficit is projected to be more than twice as big this year.
Investors have sold 24 percent of the money they had in Indian bonds since May, according to a Credit Suisse analysis of Indian government figures. All of that money leaving the country makes the national currency, the rupee, worth less.
For ordinary Indians, the falling value of the rupee has quickly made foreign goods more expensive, fanning inflation.
Indian lawmakers have taken a number of steps aimed at stemming the tide of money rushing out of the country. The government has tried to limit the amount of investments Indian companies can make overseas, and has also tried to curtail purchases of gold and silver from abroad. All of these measures, though, have appeared to make the problems worse.
Initially the government just tried to talk their way through by saying everything is all fine, but it did not work, said Singhal, the consultant. Then they get into active intervention in the market, but that hasnt worked either.
Central bankers are in a somewhat difficult position because in order to keep more money in the country and tame inflation, interest rates need to rise. But higher interest rates make it harder for local companies to borrow, potentially limiting economic growth. That is leading to unusual measures like the bond-buying program that the Indian central bank announced Tuesday.
Some Indians are pinning their hopes on the arrival of Raghuram Rajan, a highly regarded University of Chicago economics professor who is set to take over the helm of the Reserve Bank of India in September.
But many economists say they believe that the problems are unlikely to significantly improve before the national elections bring in a new government next year.