MUMBAI: When governor Raghuram Rajan laments that co-ordination among global policy makers is collapsing, the man who saw the 2008 credit crisis coming probably sees something disturbing.

Last week he raised the interest rate by 25 basis points citing high consumer prices, triggering the usual criticism that monetary policy cannot contain food prices. But what was unsaid was that there was a currency angle to it as well. With the Federal Reserve pushing ahead with its tapering of monthly bond purchases, which is down to $65 billion a month from $85 billion earlier, emerging markets which have been living on borrowed money, are teetering.

Global investors have pulled out $6.3 billion from emerging market stocks in the week ended January 29, the biggest since August 2011. Nearly $12 billion has flowed out this year, close to the $15 billion in 2013.

Investors are pulling out funds not only because of rising borrowing costs in developed market, but also because of slowing economic growth in emerging markets, especially China. Weak government finances, a fragile financial system and sharp price rises are making them uncompetitive in a global market. Real returns, the difference between the nominal yield and the rate of inflation, is beginning to haunt the emerging markets which enjoyed low rates because of surging global liquidity. Global investors are not willing to provide easy money to developing nations anymore.

“When you have low real rates and try to finance your current-account deficits, it usually won’t work,” Dirk Willer, a Latin America strategist at Citigroup, the second-largest currency trader, was quoted as saying by Bloomberg. “If the US is repricing for higher rates, it’s very difficult for you to get away with lower rates.”

One-year loans in Turkey costs 3.6% on real terms after the central bank doubled the benchmark rate last week, Bloomberg data shows. The real rate for Mexico is almost zero, while South Africa’s is 1.4%. In India the borrower is paid more than a percentage if calculated in real terms. The 8.73% yield on the 10-year government bond yield is lesser than the 9.9% increase in consumer prices.

The global inflation ranking picture is not pretty. India is ranked 108th among the 113 countries in a Bloomberg table where nations such as Uruguay, Angola and Indonesia are better placed. Higher interest rates are the easiest form of defence. But the problem is that every country could do that. So, what can be the differentiator? Investors love low inflation, sound government finances, and high economic growth.   On the inflation front, the negative real rates indicate it is a long way to go to tame inflation. Even Rajan who is targeting consumer prices at 4% within a 2 percentage point band, as recommended by Urjit Patel panel, is looking at the end of 2015.

There is nothing much to cheer about on the economic growth front either. The Reserve Bank of India is expecting growth to be around 5.5% next fiscal, which may not be attractive enough for an international investor who has better options. The only factor that seems to be going as per the book is the fiscal deficit. But that’s deceptive.

Everyone will read about it being below 4.8% of the gross domestic product, but hardly anyone believes it. It is as good as the achievement on foreign direct investment in retail.

Last year’s growth was revised to 4.5% from 5%. That reflected the fiscal deficit drive when spending cuts hit the economy. This year, it could be worse. The world will know about it next January. But the market shows what is in store. State Bank of India’s share sale Rs 8,032 crore was lower than the targeted 9,410 crore. When a broke government, breaks the companies it owns to manage a number, it is not a good sign.