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Central banks in EU emerging markets take action

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LONDON — Following a bout of market turmoil that's weighed on their currencies, central banks in emerging economies are moving fast to contain the damage.

While the People's Bank of China on Tuesday injected more money into the country's financial markets to ease strained credit conditions, India's central bank unexpectedly raised interest rates to prop up its ailing currency.

Turkey's central bank is expected to follow suit later in the day at an emergency policy meeting it called after the lira hit a series of all-time lows.

"The market is expecting a lot and should the central bank fail to deliver we expect another round of lira weakness," said Christian Lawrence, associate director of foreign exchange strategy at Rabobank International.

Much of the turmoil in global financial markets over the past week has been due to developments in emerging economies. Argentina suffered the most eye-catching fall in its currency amid concerns over the government's economic policies.

However, there are broader worries that emerging markets, which have been some of the fastest-growing in recent years, are particularly vulnerable at the moment as China's economy slows and the U.S. Federal Reserve tightens its policy.

The Fed is expected to announce another $10 billion reduction in its monthly stimulus to $65 billion. For the past few years, the Fed's stimulus has helped shore up financial markets around the world.

Emerging markets, particularly their currencies, were in favor during that period as investors looked for higher returns. With Treasurys and other developed market bond markets offering meager returns, currencies like the Indian rupee and the Brazilian real soared.

Now that the prop of the stimulus is being taken away and Treasurys are starting to look more attractive, a lot of the money underpinning emerging markets is flowing out. As a result, that pressures currencies. That's been evident across the emerging world over the past few weeks, notably in India and Turkey.

In a move to shore up its currency, the Reserve Bank of India raised its benchmark interest rate by a quarter of a percentage point to 8.00 percent. Though it justified the move in terms of keeping a lid on inflation pressures, protecting the rupee is widely considered to have been a key motive. Following the move, the rupee rose 0.7 percent to trade at 62.66 rupees to the dollar.

"Although it went unmentioned in the RBI's statement, the recent sell-off in emerging market assets may have played a part in today's decision," said Miguel Chanco, India economist at Capital Economics.

That said, Chanco noted that the rupee has been a little more resilient of late largely because of a substantial fall in the country's current account deficit — the difference between what it exports and imports.

After the Argentine peso, the emerging market currency that has performed worst this year has been the Turkish lira. The central signaled Tuesday it is ready to raise interest rates at an emergency meeting it will hold later in the day.

The central bank governor, Erdem Basci, said the bank was revising up its inflation forecasts because of the lira's recent slide and was prepared to raise rates, a move the government has frequently railed against.

Lawrence, the currency strategist, said the bank is most likely to sharply increase the upper band of its interest rate corridor — possibly by 2.25 percentage points to 10 percent.

Ahead of the meeting, the lira was stable, trading 0.1 percent higher at 2.26 lira to the dollar. On Monday, it fell to a record low of 2.39 lira to the dollar before the central bank said it would hold the emergency meeting.