LONDON: Emerging markets were swept lower by a wave of global risk aversion on Tuesday, with India's rupee one of the few currencies to show any resistance after its central bank nuanced a widely expected interest rate cut.
Political turmoil in South Africa and Brazil and fighting in Azerbaijan added to uncertainty, but it was the familiar themes of weak oil prices and potential US rate rises that landed the biggest blows.
MSCI's 23-country emerging market index saw its second fall of over 1.5 percent in three sessions.
Oil-rich markets including Russia and Qatar led the way, while eastern Europe stocks suffered their worst day since February as poor data from their biggest export market, Germany, also soured the mood.
"The rally over emerging market is definitely losing steam," said Credit Agricole emerging market strategist Guillaume Tresca.
"The (strong) US payrolls data on Friday was the main trigger and we expect to see 'risk off' (sentiment) at least till tomorrow's Federal Reserve minutes. Oil prices are also falling again so that is a new negative factor."
India's central bank cut its policy interest rate by 25 basis points to 6.50 percent, reducing it to a more than five-year low while dangling the prospect of another cut later this year if inflation trends stay benign.
But as part of a balancing act to reduce the risk of cash flooding the system, it also unexpectedly raised the reverse repo - the rates lenders charge to the central bank - by 25 basis points to 6.0 percent.
That briefly confounded currency traders and the rupee hit a 4-month high, though it eventually bowed to the rate cut and wider market selling to ease back to 66.4250 per dollar.
"We were a bit surprised by the narrowing of the corridor," added Tresca, "because it could suggest a hint of tightening."
South Africa's rand dropped 0.7 percent and yields on its bonds rose as President Jacob Zuma looked set to win an impeachment vote and the country's central bank warned about risk of a credit rating downgrade.
The loss of investment grade status for Africa's most industrialised economy would hit the rand hard the bank said and could push interest rates up 80-100 basis points.
"Today's vote to impeach President Jacob Zuma will almost certainly fail," said Capital Economics in a note. "But efforts to oust the president will continue, potentially distracting political attention from South Africa's dire economic situation."
Markets were also jittery about a flare-up of a decades-old conflict in Azerbaijan around the Armenian-backed breakaway Nagorno-Karabakh region.
The Azeri manat saw its biggest fall on Monday since the currency was allowed to float more freely back in December, and it remained under pressure at 1.5165 to the dollar.
A return to war would destabilise a region that is a crossroads for strategically-important oil and gas pipelines.
It could also drag in the big regional powers, Russia and Turkey. Moscow has a defence alliance with Armenia while Ankara backs Azerbaijan.
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