Emerging economies are bouncing back. Rising commodity prices, booming equity markets and interest-rate differentials have seen capital inflows into these countries going up sharply. Brazil, for instance, recorded heavy portfolio inflows in the second quarter of 2009, after a short recession. Inflows for the three months ended August stood at $5.19 billion, rising a whopping 159% on an annual basis. During the same period, foreign direct investment (FDI) stood at $1.55 billion, down 56%.

The South American country’s government isn’t entirely happy. For two reasons—it fears the money may leave as quickly as it came in, and that the Brazilian real will appreciate further, hitting exports. (The currency has already gained over 36% against the dollar in 2009). And so, President Lula da Silva’s government recently imposed a 2% tax on foreign capital inflows into equity and fixed income.

The tax on inflows into equity and fixed income instruments seeks to control the rise of the Brazilian real and prevent bubbles in the economy.

Justifying the move, Brazil’s Finance Minister, Guido Mantega, told reporters: “Our concern is with excessive speculative investments—short-term capital that could cause a bubble.” Noting that 25% of Brazil’s industrial output is exported, Mantega added: “With our currency overvalued, we’re going to export less and we’re going to be less competitive.”

This isn’t the first time Brazil has passed such a measure. In March 2008, it levied a tax of 1.5% on fixed-interest investments (the tax was eliminated in October 2008 when the global crisis started to spread). In a little more than two weeks, the real depreciated 4.6% before continuing to rise again. “We do not think this time will be any different,” says a research note from Barclays Capital. It added that while the dollar and real seem poised for a correction soon, the new tax would not reverse the trend of the dollar’s weakness. “Fundamental growth differentials will continue to attract inflows into Brazil and maintain the Brazilian real’s appreciation trend,” the report adds.

So, will other emerging countries follow suit and impose similar controls? No, says a Citi report, titled Emerging Markets Macro and Strategy Outlook (dated October 22). “The risk of capital controls in Asia is low, although Taiwan and Korea are probably closest.”

Taiwan’s case is understandable—the export-dependent nature of the economy makes it highly sensitive to a significant currency appreciation. For India, Indonesia and Philippines, which are less export dependent, foreign exchange appreciation should be tolerable, especially as inflation pressure builds, adds the Citi report.

“We are sceptical about the effectiveness of unconventional policies, and do not believe initiatives such as the Brazilian tax will soon spread to other countries” says Michael Gavin, Head of Emerging Markets Strategy at Barclays Capital in a research note.

India, too, has recorded buoyant capital inflows. As of October 23, net FII investments, in both equity and debt, stood at $15.37 billion for 2009. This is quite high compared to a net outflow of $9.45 billion for the same period in 2008. “But that would not push regulators to apply the brakes,” says an economist. The chances of such a move are even less likely given that the Reserve Bank of India does not pursue an exchange-rate management policy.