As their currency rates witness a sharp decline against the US dollar, "serious tremors" have been generated in India and many other emerging markets, the Bank for International Settlements (BIS) said.
According to a new report published by Switzerland-based BIS, which is also referred as 'bank for central banks', the US Federal Reserve's announcement of a possible phasing out of easy money regime has resulted in "abrupt and sizeable" equity market losses in both advanced and emerging markets.
Besides, it has also caused steep falls in domestic currencies of many emerging countries including India.
The BIS said a number of central and eastern European countries benefited, as investors perceived them to be relative safe havens among emerging market economies.
"This was due to these countries' better current account balances, as well as their greater reliance on exports to the euro area, which had shown signs of recovery," it said.
As per BIS, in the case of some countries, including India, having high current account deficits, high domestic inflation exacerbated the situation.
"At end-August, year-on-year WPI (Wholesale Price Index) inflation in India was close to 6 per cent and CPI inflation in Indonesia and Turkey was above 8 per cent, partly because of significant currency depreciations that had raised import costs," the report said.
High rates of inflation may in turn lead to additional nominal depreciation, thereby fuelling a vicious circle, it added.
"With emerging market authorities facing challenges on several fronts, their main policy responses aimed at curbing the depreciation of domestic currencies," BIS said.
In the face of rapidly declining investor confidence, BIS said the Reserve Bank of India intervened to put upward pressure on money market interest rates and imposed capital controls.
"By late August, however, there were few signs that this had slowed the pace of the rupee's depreciation," it said.
To stymie the fall in rupee, the Indian government has also announced long-term measures to contain the current account deficit, including taxes on silver and gold imports, and steps to liberalise iron ore exports as well as reducing the country's dependence on imported coal.
Without naming any particular country, BIS also said that sizeable foreign exchange interventions of several central banks contributed to significant reductions in official foreign reserves over the past few months.
Not just India, central banks of emerging nations such as Indonesia, Turkey and Brazil raised policy rates and intervened in foreign exchange markets. These efforts were aimed to reduce the outflow of foreign capital and stabilize their domestic currencies.