* MSCI EM stocks index up 0.6%; Fed vows to stay accommodative
* Russian rouble up 0.2% after 1% drop on Wednesday
* Turkey cenbank expected to raise rates by 100 bps
By Susan Mathew
March 18 (Reuters) – Emerging market stocks made handsome gains on Thursday after the U.S. Federal Reserve kept its dovish stance, while Russia’s rouble rebounded after a sanctions threat-driven slide and Turkey’s lira firmed ahead of a key central bank meeting.
MSCI’s index of EM stocks rose 0.6% with India and Turkey sitting out a rally in most other main indexes from China to South Africa.
Currencies of the developing world rose as much as 0.4% before paring some gains as rising U.S. Treasury yields saw the dollar regain traction.
The Fed on Wednesday gave a robust outlook for U.S. economic growth and said any pick-up in inflation should be temporary and does not warrant a move away from its accommodative stance.
Ratings agency Fitch said it expects the Fed to start tapering early next year, which could impact emerging markets given the “outsized role” of the U.S. dollar in EM lending and global credit markets.
Higher U.S. yields will feed through to a higher cost of EM borrowing in foreign and local currency, Fitch said.
Turkey’s lira was up 0.2%. The central bank is expected to raise its policy rate by 100 basis points to 18%, a Reuters poll showed, after inflation rose more than expected to 15.6% and the lira lost nearly 8% since mid-February. The decision is due at 1100 GMT.
“In order to keep inflation on track to end this year at (the central bank’s target of) 9.4%… it is crucial that the lira offers a sufficiently attractive carry trade… in the coming months, or at the bare minimum to be relatively stable against the dollar,” said Michael Every, a senior macro strategist at Rabobank.
“Raising interest rates by at least 100 bps would be a signal that the (central bank) remains vigilant about the outlook for inflation.”
Russia’s rouble firmed 0.2%, after a 1% slump on Wednesday triggered by fears of more severe sanctions following a scathing rhetoric from U.S. President Joe Biden against Russian counterpart Vladimir Putin over the 2020 U.S. elections.
Eyes will be on the actual nature and extent of sanctions due as soon as next week, according to sources.
On Friday, Russia’s central bank is seen keeping its key interest rate on hold and preparing markets for an imminent hike.
Overnight, Brazil’s central bank delivered a larger-than-expected 75 basis point increase to 2.75%, and flagged a similar move in May to fight inflation despite rising economic uncertainty.
South Africa’s rand was flat on Thursday, giving away its post-Fed euphoric gains. The Mexican peso also suffered a similar fate.
For GRAPHIC on emerging market FX performance in 2021, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2021, see https://tmsnrt.rs/2OusNdX
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(Reporting by Susan Mathew in Bengaluru; Editing by Subhranshu Sahu)
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