The Indian rupee hit an all-time low of Rs. 69.62 against the U.S. dollar following the currency disorder in Turkey. The Turkish lira has been on a free fall, dropping 12% on Monday morning. Last week, on Friday, the currency slipped 16%, and over the past 12 months, the currency lost over 50% of its value, indicating something majorly wrong with the economy.
What’s wrong with Turkish lira?
The Turkish economy has been going through a rough patch for quite some time now, and the situation has only worsened lately. The inflation rate of the country peaked at 15.9% in July. To give a clearer idea, the inflation rate of India for June came in at 5%, triggering a revision of the policies from the Reserve Bank of India (RBI).
Coming to the debt part, Turkey’s current account deficit (CAD) is touching 5% of its gross domestic product. A higher CAD to GDP ratio is a huge burden to the economy. For India, CAD is around 2% of the GDP, due to a spike in the import bill on the back of rising crude oil prices.
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Turkish President Tayyip Erdogan, who carries firm control over the economy and calls himself the “enemy of interest rates,” is keen to get cheap credit from banks to spur growth. However, investors fear overheating of the economy.
Investors are worried that the Turkish companies, which borrowed heavily to gain from the construction boom, may fail to pay back in dollars and euros as the weakened Turkish lira means they will have to pay more. According to Reuters, over a third of Turkish banks’ lending is in foreign currencies.
Explaining the problem with the Turkish lira, Edward Park, investment manager at Brooks Macdonald, notes that Turkey has tripled its U.S. dollar liabilities over the last ten years. However, with the U.S. changing its stance and talking about tightening liquidity and raising rates, it has become difficult for the emerging markets to finance in U.S. dollars.
In another blow to the country, U.S. President Donald Trump last week announced that he is doubling the U.S. import tariff on Turkish aluminum and steel.
Contagion effect on Indian rupee and other currencies
The global market reacted to the news as well, including India, since emerging economies have more to lose in the wake of events like this. Along with the Indian rupee, the Indian equity market also took a hit on Monday owing to weak global cues on the back of concerns around the Turkish lira. The equity market tumbled about 250 points.
It is not just India, but other BRICS nations also felt the heat on Monday. The Russian rubble was already under pressure after the U.S. sanctions on Moscow last week, and the Turkey news eroded the currency further. The South Africa rand fell around 7%, whereas the Chinese yuan fell just by half a percent.
The Indonesian rupiah dropped approximately 1%, the steepest since October 2015. However, the drop was also contributed by the recent data showing rising CAD, the largest in almost four years. The authorities, however, are already working on defending the rupiah.
Meanwhile, there are also concerns that some European banks have exposure to Turkey, and this would show in their balance sheets and P&L. The Euro, however, has already been dropping after breaching the critical 114 level. But, the drop has more to do with the weakening emerging markets. The negative sentiment is obviously taking over Asia, and is one major reason why the Indian rupee has broken the crucial level of 69.
What experts say?
Analysts expect Asia to come out of this mess owing to the robust foreign exchange reserves and smart fiscal and monetary policies. “Asia should not see any contagion effect fundamentally due to the ongoing crisis in Turkey as the region does not have meaningful exposure to the country. We would see any meaningful correction in bond prices on the back of the Turkey developments alone, as a buying opportunity,” said analysts at Singapore’s DBS, according to Express.
On the other hand, many believe that there is more pain in store if investors continue to fear the events in Turkey, and there are good chances that we may witness panic selling in the markets.
Nevertheless, Turkish authorities will have to soon devise a plan to cope with the current situation, and as of now, there is no respite in sight. If the situation remains, it could engulf other emerging economies as well.