- The Indian rupee recorded its biggest intra-day fall, hitting 70.08 against the greenback, amid rising concern that the precipitous slide of the Turkish lira could spark fresh turbulence in global currency markets.
Why fall in Lira?
- The lira has been in free fall following political and economic problems in Turkey, combined with doubling of US import tariffs on Turkish steel and aluminium.
- The lira had been the world’s worst performing currency, having slid by almost 50% against the dollar in the past one year.
- The primary reason for the ongoing rout in the lira, though, is poor economic management by the government of President Recep Tayyip Erdogan.
- The Turkish economy is overheating due to soaring inflation, leading to mounting levels of foreign debt and a very high current account deficit.
- Both the Turkish government and central bank are facing a serious loss of credibility.
- Behind the trade dispute is a standoff over Andrew Brunson, an American Christian pastor who has been detained in Turkey since October 2016 on charges of terrorism, espionage, and of helping plan the failed coup d’état against President Erdogan.
- Turkey is also holding an American NASA scientist, and three Turkish nationals working for US consulates in the country.
- Trump on July 26 threatened “large sanctions” if Brunson was not released immediately.
- The tariffs and the crash of the lira followed, and the two countries were plunged into the worst bilateral crisis since the US arms embargo on Turkey following its invasion of Cyprus in 1974.
- According to estimates by the International Monetary Fund, Turkey has the “least adequate level of reserves of the major emerging market economies, which makes it particularly vulnerable to speculative attacks”.
- Also there are concerns about political interference with the “independent” central bank.
Impact on rupee
- The rupee has been on the downslide this year, having slipped 9% in 2018 as foreign investors sold $6.8 million and $5.15 billion in equity and debt markets respectively.
- Turkey’s currency crisis has been the trigger for fresh selling across emerging markets, and the rupee has reacted sharply.
- The rupee has been among the hardest hit in Asia from the Turkey-led selloff in emerging assets, largely due to a wide current account deficit (CAD, or the difference between the country’s imports and its exports) that is already strained by higher oil prices.
- Analysts maintain that the rupee extended losses on account of panic demand from importers, who are buying dollars aggressively.
- Going forward, analysts expect factors such as the broader trend of currency movements in key emerging markets, the trend in crude oil prices, and the trajectory of the greenback strengthening against other currencies to drive the outlook for the rupee in the short term.
- Despite the slide in the value of the rupee relative to the dollar, it needs to be kept in mind that the fallout has negatively impacted most major currencies, especially those from emerging markets.
- According to the investment information and credit rating agency ICRA, the RBI is likely to assess the trend in the rupee vis-à-vis the emerging market currency pack, and if all emerging market currencies are depreciating, the rupee must weaken to protect export competitiveness.
- A weaker currency does, however, make imports costlier. High oil prices (India is the world’s third biggest oil importer and ships in about 80% of its crude oil requirements) exert further pressure.
- The RBI has already hiked interest rates twice in its last two reviews to check inflationary pressures. It has also been intervening in the currency market using its foreign reserves to check currency volatility.
- In a recent report, the IMF had flagged global risks such as high oil prices and trade tensions among the factors weighing on India’s growth outlook. There will also be an impact on product prices.