Here's why some Asian Central Banks are raising rates

An easy exit from their current account deficits?

According to Moody's Analytics, despite easy monetary settings across much of the world and below-trend growth at home, central banks in India and Indonesia are raising interest rates to support their ailing currencies, clamp down on inflation, and reduce current account deficits.

Here's more from Moody's:

Since June, Bank Indonesia has lifted rates by 150 basis points to 7.25%. In late September, India hiked its benchmark rate by 25 basis points to 7.5%.

Market speculation around a September taper from quantitative easing in the U.S. caused investors to pull funds from riskier emerging markets and park them in traditional haven assets such as U.S. and Japanese treasuries. The selloff caused a sharp depreciation in emerging market currencies against the dollar. ]

Investors punished Indonesia and India severely because of their large current account deficits and long list of structural deficiencies. The Indian rupee fell more than 12% through August and early September, while the Indonesian rupiah fell around 13%.

Weaker exchange rates as well as a reduction in fuel subsidies in Indonesia have contributed to a strong upturn in price pressures. Indonesia’s annual inflation rate climbed to 8.8% in September, after averaging 4.8% through the opening months of the year.

In India, consumer prices expanded 6.5% year over year in September, after reaching a bottom of 4.7% in May.

Yet tighter rates have not had their desired effect, as global investors continue to dump the rupiah and rupee, proving that monetary policy in small open economies cannot influence global investor sentiment as that in the U.S. can.

Indeed, following the Federal Reserve’s September 18 decision to hold off tapering, the rupiah and rupee jumped 2.1% versus the dollar the next trading day, a much larger rise than the 0.7% to 0.9% gains witnessed after recent rate hikes.

The likelihood that the Fed will maintain its asset purchase program for longer has eased the pressure on capital outflows from India and Indonesia.

The nomination of Janet Yellen for Fed chair further suggests the U.S. will maintain easy monetary settings in the near term. Despite this, however, central banks in India and Indonesia remain wary of renewed capital outflows when the Fed eventually begins unwinding its stimulus program.

If recent history is any guide, tighter domestic rates will do little to allay market concerns over bulging current account deficits and structural deficiencies in India and Indonesia.