Rupee’s dramatic drop prompts fears that investors will turn against Fragile Five

INDIA’S currency fell to an all-time low, reaching 70 rupees against the US dollar yesterday in the wake of Turkey’s currency crisis. The dramatic weakening adds to fears of a widespread collapse in emerging markets investor confidence.

The rupee’s devaluation has also prompted concerns of a return of the socalled Fragile Five economies and risks of a wider emerging markets sell-off.

The Fragile Five, a term coined by investment bank Morgan Stanley in 2013, refers to those economies with an over reliance on growth fuelled by foreign investment, identified as Brazil, India, Indonesia, South Africa and Turkey. This left them exposed when the US reduced its post-crisis money printing programme, resulting in the so-called taper tantrum.

Following the fall of Turkey’s lira – which lost 40pc against the dollar – after a diplomatic row and current account deficit triggered a meltdown, there is a fear investors may again treat these five and other emerging markets as one asset class.

This could trigger further capital flight from the countries, sparking contagion. According to Lale Akoner, of BNY Mellon Investment Management, although investor nervousness may not have been justified after reform in many economies, “an idiosyncratic risk for Turkey did feed into the negative sentiment towards [emerging markets] in general”.

She added: “It brings back the worry that investors have against [emerging markets], the global liquidity dry-up through central bank tightening.”

India has launched a $23bn (£18bn) effort to defend the currency so far this year, according to a spokesman.

Hugo Erken, of Rabobank, said that a weaker currency was not necessarily a bad thing for the Indian economy, as the currency had been overvalued.