Rupee, rupiah skid as Fed taper talk rattles Asian markets

By Swati Bhat

MUMBAI (Reuters) - Vulnerable emerging Asian currencies weakened and regional shares tumbled to six-week lows on Wednesday as mixed signals from Federal Reserve officials raised prospects for the U.S. central bank to roll back its asset-buying stimulus next month.

Jakarta's Composite Index stumbled 2 percent to a two-month low as the Indonesian rupiah hit its weakest in more than four-and-a-half years. Foreign banks sold the currency despite the central bank's surprise rate hike in the previous session, sending it down as much as 0.7 percent to 11,670 per dollar.

Asian shares took a battering.

MSCI's broadest index of Asia-Pacific shares outside Japan lost about 1.5 percent to its lowest levels in more than a month, on track to mark a fifth straight decline. Japan's Nikkei stock average ended down 0.2 percent.

The Indian rupee slumped to a two-month low of 63.90 per dollar before suspected intervention by the Reserve Bank of India via state-run banks helped it recover to 63.55.

Global markets have been buffeted since May over speculation of an imminent end to cheap U.S. dollars, a major driver of assets in recent years. Indonesia and India, which have sizable current account deficits, seem particularly vulnerable to an exodus of capital toward more attractive dollar assets.

Fed officials gave mixed signals on Tuesday.

Atlanta Fed President Dennis Lockhart told reporters that a reduction of the central bank's quantitative easing program remains a possibility at the Federal Open Market Committee's next policy meeting on December 17-18, although he did say policy should remain very easy.

While Narayana Kocherlakota, president of the Minneapolis Fed, spoke of a need for aggressive action to foster growth.

Analysts said any perception that the Fed's tapering would begin soon would put pressure back on economies with sizable current deficits, like Indonesia and India, due to risks of an exodus of capital toward more attractive dollar assets.

"Firm U.S. data will reignite QE (quantitative easing) tapering concerns, pulling dollar higher and vulnerable Asian currencies lower," said Radhika Rao, economist with DBS in Singapore.

Data on Friday showed an unexpected surge in U.S. jobs growth in October, suggesting the labour market could be strong enough for the Fed to begin to pare its $85 billion-a-month bond-buying programme sooner rather than later.

The rupee hit a record low of 68.85 in late August, driven by the combination of a widening current account deficit, outflows of foreign portfolio money and worries over the central bank's ability to defend the currency.

Adding to India's problems surging consumer prices in Ocotber have raised fears that the RBI will raise interest rates further, damaging chances of a recovery in weak economic growth, which could also be bad news for the rupee.

Consumer price inflation accelerated more than expected to 10.09 percent in October from 9.84 percent in September, data released on Tuesday showed.

"After a brief respite, the headwinds for the Indian rupee are back at the fore by way of rate tightening fears and elevated inflation," DBS's Rao said.

To defend the rupee over the summer months, the RBI and government took a series of measures to curb imports, attract foreign investment and tighten short term cash rates.

Key among those measures was a swap window offered by RBI to banks raising dollars abroad, and to meet the heavy dollar needs of oil importers.

But the swap window is due to be closed by the end of this month, and with U.S. data suggesting the Fed might pare back its asset purchases sooner than some had anticipated, and signs that India's current account deficit could widen again, analysts are bracing for another big round of rupee selling.

Chinese shares underperformed after the initial communique from a key Communist Party policy meeting to set a blueprint for the coming decade's reform agenda offered them few concrete details.

The China Enterprises Index of the top Chinese listings in Hong Kong was down 2.7 percent, while Hong Kong's Hang Seng Index fell 1.9 percent.

(Writing by Lisa Twaronite in Tokyo; Editing by Simon Cameron-Moore)