LONDON, Aug 21 (Reuters) - The rout in emerging markets gathered pace on Wednesday, extending to the Turkish lira which, with India's rupee, hit new record lows in a sell off prompted by the expected tailing off of extraordinary U.S. money printing.
The U.S. Federal Reserve publishes the minutes of its most recent meeting later in the day. Investors are hoping for some clarity about the timing of plans to pare, or taper, its $85 billion-a month money quantitative easing programme.
Turkey's lira fell to a record low just a day after the central bank raised interest rates a half point to bolster the currency. The move was deemed by markets to be an inadequate policy response given the scale of the challenges facing emerging markets.
The Fed's largesse has been a major factor in the recent success of emerging market assets. Since the start of August, however, currencies from countries such as India, Indonesia and Brazil have fallen more than 5 percent against the dollar.
Emerging equities slumped for the fifth straight session on Wednesday, losing more than two percent this month.
"The market is broadly trading with tapering fears in mind," said Luis Costa, head of CEEMEA currency and debt strategy at Citi.
Fears of the steady reduction in the amount of cash pumped into world markets from the United States are taking a toll on emerging markets in general, but especially those such as India and South Africa that rely heavily on foreign capital to plug funding deficits.
Investors have also been dismayed by the piecemeal tactics employed to stem the currency selloff by some emerging policymakers who have balked at significantly raising interest rates for fear of hurting economic growth.
The Turkish central bank on Tuesday raised its lending rates - the price at which it funds the market - by half a point to 7.75 percent but said this higher rate would apply only on special days. The lira fell 1 percent against the dollar.
Costa described the decision as "timid".
"Let's be honest - yesterday's move didn't change much," he said. "If the primary objective is to make long dollar-lira positions costly, then I don't think the bank is being very effective... We are going to see more negative trading dynamics in the lira."
U.S. 10-year Treasury yields eased slightly off two-year highs but pressure on emerging markets elsewhere was unabated as the Fed minutes could jolt the yields higher again.
India's battered government bonds were seeing their best day in 15 years after central bank announced some debt buybacks and eased some regulations pushing 10-year yields down almost 60 basis points
But this provided little relief to the rupee which plumbed fresh record lows beyond 64 per dollar falling 2 percent.
Deutsche Bank said the rupee could soon hit 70 per dollar.
"As numerous episodes of past currency crises have amply demonstrated ... currencies can overshoot substantially and remain so for a long time," it said. "India, we fear, is entering such a zone".
The Indonesian rupiah hit new four-year troughs, with the psychologically significant 11,000 per dollar mark in sight.
The South African rand fell more than one percent to new six-week lows against the dollar while bond yields rose after data showed annualised inflation at 6.3 percent, breaching the central bank's target band.
Losses on all these currencies will probably intensify the exodus from emerging stocks and bonds.
Data in Indonesia showed foreigners had dumped $430.5 million worth of stocks from Friday to Tuesday, during which time, Jakarta shares lost nearly 11 percent. Indian stocks and bonds have seen $11.5 billion in outflows since end-May.
Analysts reckon there is more pain ahead especially if the Fed does as expected.
"The (recent) jump in U.S. Treasury yields highlights the pressure under which emerging bonds and currencies will remain until we get a clearer picture on the Fed policy outlook," said Simon Quijano-Evans, head of emerging markets strategy at ING Bank.
"We continue to recommend new money to remain sidelined."