A wave of relief swept across Asia, Europe and Africa after the US Federal Reserve decided to maintain its pace of monetary stimulus, as investors and governments concluded that the financial environment for emerging markets would be less harsh than expected in coming months.

Currencies and stock markets across the developing world rose as short-term interest rates held steady in the United States and long-term interest rates actually dipped there, making it more attractive to put money into higher-yielding investments in developing countries for at least a few more months.

Some of the biggest market increases took place in Indonesia, which has tended to be the emerging market most affected by Fed decisions over the years and the country hardest hit by traders over the past couple of weeks. The Jakarta stock exchange rose nearly 5 percent, and the rupiah gained 4 per cent against the dollar.

The Bank of Indonesia cautiously welcomed the Fed’s decision. “For us, this is a short-term relief,” said Difi A Johansyah, the bank’s chief spokesman and the chief liaison to Parliament and the rest of the Indonesian government. “They reduce some of the pressures for capital outflows and reduce the pressure on the rupiah for the time being, but we have to work on our homework to stabilize the rupiah. The root of the problem is domestic, the current account deficit and inflation,” he said in an interview at the central bank’s headquarters seven hours after the Fed’s decision.

The Fed’s action also gave India some breathing room. The rupee was the worst performer of the world’s 78 internationally traded currencies in August but has started to recover this month. The Mumbai stock market increased 3.3 per cent, and the rupee climbed 2.4 per cent against the dollar.

The Turkish stock market soared 8 per cent in early trading, and the South African stock market jumped 2 per cent. Latin American markets had risen sharply late Wednesday following the Fed’s announcement. But as the currency trading day progressed in Europe and Africa, there were some signs of flagging enthusiasm for emerging markets, as the Turkish lira was down 0.3 per cent after an initial jump in value and the South African rand was down 0.6 per cent.

“If liquidity flows to emerging markets revive, those economies that have suffered the most — India, South Africa, Turkey, Indonesia and Brazil — stand to gain,” said Ajay Bodke, the head of investment strategy and advice at Prabhudas Lilladher, a brokerage firm based in Mumbai. “It also increases the maneuverability that the new Reserve Bank of India governor has in charting his medium-term course for the monetary policy.”

The new governor, Raghuram Rajan, a former chief economist of the International Monetary Fund and chief economic adviser to the Indian government, took office in Mumbai on Sept. 4 released his first statement on monetary policy on Friday, taking a cautious approach. At his inaugural news conference on his first day in office, he stuck to banking deregulation.

Although India and Indonesia have attracted the most attention in recent weeks among emerging economies, other countries’ stock markets and currencies also rallied strongly on Thursday. The Hang Seng Index closed 1.7 per cent higher in Hong Kong and the Nikkei 225 closed up 1.8 per cent in Tokyo.

The big questions now are: How long a respite has the Federal Reserve taken before starting to taper its program of monetary stimulus, and how much damage may have already been done to emerging economies over the past several months by market volatility and capital flight? Most economists regard Fed tapering as inevitable, and still probable in the coming months.

Foreign borrowing

The emerging economies facing the biggest challenges in recent months have been wrestling with broadly measured trade deficits equal to several percent or more of their annual output. They have relied until now on foreign investment to pay for these deficits as well as to finance interest payments on foreign borrowing, making them especially vulnerable to capital outflows that have reached tens of billions of dollars over the summer. Falling emerging market currencies have also driven up the cost of commodities like oil that are priced in dollars.

The Bank of Indonesia raised its two benchmark interest rates by a quarter of a percent on Sept. 12, in what was widely interpreted by economists at the time as an unexpected measure to try to halt the increasingly rapid descent of the rupiah. The rupiah stopped falling after the central bank acted.

But Johansyah denied that the main motive had been to respond to currency markets, saying that the central bank’s plan had been to address inflationary pressures within Indonesia and curb the current account deficit, a broad measure of trade. “We put all of our policies toward stabilisation” of the rupiah, inflation and the current account, he said. “This is our focus now, rather than growth.”

A Goldman Sachs analysis found that interest rates fluctuated more in Indonesia in response to Fed policy actions than in any of 18 other emerging markets studied. Indonesia allows both its citizens and foreigners to hold deposits in dollars at Indonesian banks. Many were reluctant to convert those deposits to rupiah until recently because they worried that the local currency was overvalued, but the central bank now perceives signs that exporters and others with dollars are becoming more willing to convert them, Johansyah said.

“Some dollar holders are happy at this level, so they are ready to convert dollars to rupiah,” he said. The Bank of Indonesia gained political independence in 1999 after Indonesia suffered among the greatest damage from the Asian financial crisis in 1997 and 1998, although the bank continues to work closely with the government.

President Xi Jinping of China is expected to come to Indonesia on Oct. 2 and hold extensive meetings the following day with Indonesian leaders. Sofjan Wanandi, a local tycoon who is the chairman of the Indonesian Employers’ Association and a close adviser of national leaders, said in an interview that he expected China to provide Indonesia with a $25 billion bilateral swap agreement.

That would buttress Indonesia’s ability to intervene in currency markets to stem any further slide of the rupiah. The Bank of Indonesia had foreign exchange reserves of $93 billion as of Aug. 30, the most recent date available.

Some analysts cautioned that the Fed’s statement was likely to be only a ‘short-term positive,’ particularly as the timing of a reduction in bond-buying and the sustainability of a recent upswing in China’s economy remained uncertain.

After an initial relief rally over the next few days, “markets will start to fret again about tapering beginning in December. And that won’t be the end of it. Once tapering begins, the next worry will be when asset purchases will end altogether. And then, when rates will rise,” equity strategists at HSBC wrote in a research note. “We see a year or more when equity markets dip (and then recover) each time the Fed moves to (or toward) ending its ultra-easy policy.”

Meanwhile, they added, the delay in the Fed’s ‘tapering’ of its stimulus gives policy makers in Asia a chance to speed up much-needed reforms. “But the risk is that the current surge in equity markets could also bring back complacency.”