IN AUGUST 2013 as the US Federal Reserve considered when to slow its quantitative easing, Morgan Stanley identified the five major emerging markets with the most vulnerable currencies: Brazil, India, Indonesia, Turkey and South Africa.

Now, as Fed officials debate how soon to raise interest rates for the first time since 2006, India and Indonesia may have dodged the bullet. Morgan Stanley economists said they had enacted enough economic reforms to have passed “the point of inflection away from their old models of growth”.

In India’s case, inflation has halved since the end of 2013 and its current account deficit has shrunk. Investors have embraced Prime Minister Narendra Modi’s pledge to cut red tape and he is also acting to reduce the budget shortfall. Governor Raghuram Rajan won a legal mandate for the Reserve Bank of India to target inflation. The rupee has even eked out a 1 percent gain versus the dollar this year.

Meanwhile, Indonesia has taken positive steps with President Joko Widodo’s five-month administration scrapping fuel subsidies and aiming to cut the budget deficit to 1.9 percent of gross domestic product (GDP).

All told, the Morgan Stanley economists reckon India has completed 85 percent of the necessary adjustment and Indonesia 65 percent. The remaining Fragile Five have made much less progress. Morgan Stanley said Turkey had completed no more than 10 percent of recommended reforms, Brazil 15 percent and South Africa barely anything.

Current account shortfalls and inflation remain high in each and politics in the form of a widening corruption scandal at Petroleo Brasileiro, or Petrobras, in Brazil and lawmaker pressure on Turkey’s central bank are worrying investors. Such an environment has reduced their ability to cut interest rates and Brazil and South Africa may even hike them this year.

More pain before any gain is the scenario Morgan Stanley economists see: Higher Fed rates and a rising dollar could help impose a “catharsis” and force them to act. – Bloomberg