MUMBAI (Reuters) - The Indian rupee approached a record low while other Asian currencies also fell, reflecting the high stakes for regional policymakers should the Federal Reserve end a period of easy money that had boosted markets from Jakarta to Mumbai.
Fears that foreign investors will sell out of emerging markets, especially in Asia's vulnerable local-currency bonds, are hitting currencies such as rupee, which on Tuesday weakened to as low as 58.69 per dollar, not far from a record low of 58.98 hit a week ago.
Tuesday's tumbles preceded the U.S. Federal Reserve's pivotal two-day policymaking meeting. When the session ends on Wednesday, markets will keenly wait to see if Chairman Ben Bernanke comments on when and how the Fed will start reducing the third round of its bond-buying program known as "quantitative easing".
The weakening currencies come at a tricky time for Asian economies, as countries face an uncertain growth outlook for China, the region's biggest economy, with problems in India and Indonesia compounded by inflationary pressures each faces.
Some countries are already moving to shore up their currencies beyond interventions, but so far to no avail. Foreign funds have been net sellers of more than $4.5 billion in Indian government bonds in the last 17 trading sessions in what traders call an unprecedented selling streak.
The Indonesian rupiah fell as much as 0.7 percent on Tuesday even after the country's parliament took a big step to improve investor confidence by paving the way for a fuel price hike. The currency's decline was pared to 0.2 percent later as the central bank provided dollar liquidity.
Worries about debt markets could increase on concerns Indonesia's central bank could raise rates again after last week's hike. Indonesia's finance ministry raised 2.65 trillion rupiah at a debt auction on Tuesday, below an indicative target of 8 trillion rupiah.
The Philippine peso fell as much as 0.8 percent to 43.22 per dollar, while the Malaysian ringgit declined 0.8 percent to as much as 3.1580 per dollar, the weakest since July 30 last year.
Fed action to taper QE "could result in dollar outflows from India and other emerging markets, putting pressure on the currencies," said Ashtosh Raina, head of forex trading at HDFC Bank in Mumbai. "The amounts involved are huge and are definitely going to impact the global markets."
Fears of foreign selling are having a particular stress on the economies of India and Indonesia, which have attracted a surge in hot money foreign flows, largely courtesy of the Fed.
That foreign money now appears vulnerable at a time when both are suffering from hefty current account deficits.
In Indonesia, foreigners sold nearly $1 billion in bonds between the end of May and June 13, during which their holdings declined to 32.6 percent from nearly 34 percent, according to government data.
In India, a particular stress on the rupee has been heavy selling in debt markets, which had attracted about $12 billion in foreign inflows since the start of 2012 before the 17-session sell-off.
Problems in India are being aggravated by inflation fears given the continued high consumer prices is keeping the central bank more cautious about interest rates, and in Indonesia where a hike in fuel prices looms.
Besides global investors looking for high yields, Indian debt benefitted from a slew of government fiscal and economic reforms and easier investment rules for foreign investors.
Meanwhile, across Asia, signs of a recovery in the U.S. economy is being offset by China, whose economy grew at its slowest pace for 13 years in 2012, and continues to surprise on the downside.
Perhaps the bigger concern is that the period of global uncertainty could be prolonged, marked by constant guessing about the timing of any Fed move to end its stimulus program and the end of Bernanke's tenure at the U.S. central bank in January.
"There is further depreciation to occur at least until this transition period is over," said Suresh Kumar Ramanathan, head of regional interest rate and FX strategy at CIMB Investment Bank in Kuala Lumpur.
That uncertainty is reducing the impact from policy makers. India's Finance Minister Palaniappan Chidambaram last week attempted to win back market confidence by pledging new reform measures and talking up the economy, but the rupee and bonds remained embattled.
Additional reporting by Subhadip Sircar in MUMBAI and Jongwoo Cheon in SINGAPORE; Editing by Richard Borsuk