Today, Indian rupee touched its historic low of 70-mark, not just because of the volatility in the crude oil or a fall in the Chinese Yuan, but also because of a one-sided fall in Turkish lira which is down more than 40 percent.
The rupee weakened by 1.90 percent in the last two trading sessions as Turkey’s currency crisis rattled global markets. The rupee seems to be following its August month seasonality (average depreciation over last 10 years has been 2.25 percent) and this time also it has been down by 2.10 percent against the US dollar.The US sanctions against top Turkish government officials and unorthodox economic policies by Turkey’s President Erdogan have spooked the global markets.
In rescue operation to curb losses in the lira, the Turkish authorities made efforts to boost liquidity in the market on Monday through a host of measure like reducing reserve requirements, etc.
Additionally, we have seen ruble sliding to its lowest level since late 2016 after the US said it would impose fresh sanctions.
Since the beginning of the year, the Indian rupee has been the worst performing currency by leading the list of Asian currencies with a fall of 8.8 percent, followed by Indonesian rupiah (-7.2 percent), Philippine peso (-6.6 percent) and yuan (-5.5 percent).
The only currency which is up against the US dollar is the Japanese yen (+1.7 percent) as rising pessimism across major global markets led to a flight of capital towards a safe-haven asset.
However, Gold prices hit 17-month lows on Monday, losing out to US Treasuries and a stronger dollar. It is not just EM currencies which felt a tremor, but DM currencies also came under pressure, especially Euro as they are overly concerned about the exposure of some of the biggest lenders to Turkey. The European banks have exposure worth USD140bn to Turkish assets.
The risk is that Turkish borrowers may not be hedged against the Lira’s weakness and begin to default on foreign-currency loans.
The recent upbeat domestic economic data failed to impress the Indian Rupee amid the domino effect of currency.
After strongest factory growth in 5 months denoted by IIP which accelerated to 7 percent in June from 3.90 percent, Tuesday’s data showed that India’s retail inflation came in at 4.17 percent in July from a year earlier, lower than the 4.5 percent market expectation and far lower than the previous figure of 5 percent.
After raising interest rates twice since June to curb rising price pressures, the RBI’s job this time would be to keep currency value in check as depreciating currency makes imports costlier. Further, a rising trade deficit could create the headwinds for the economy. In July, India’s trade deficit widened to USD 18.02 billion- the highest level in five years, fuelled by buoyant oil prices.
The RBI has depleted almost USD 24 billion till date to curb losses and volatility in the Rupee; however, they are likely to intervene less aggressively if the Yuan, Lira and other EM currencies continue to depreciate.
The endeavour of the RBI would be to manage the real effective exchange rate of the Rupee (REER), preventing extreme overvaluation and to contain volatility by smoothening the pace of Rupee depreciation.
The recent nervousness in the global markets and a contagion effect of falling lira could put further pressure on the EM currencies in upcoming weeks.
Additionally slow covers by exporters and panic covers by importers, FPI’s may trigger additional buying and trigger lots of stops above 70 levels.
We maintain a view of further weakness in the Indian rupee and if we see the fundamentals deteriorating on the deficit front and on the fiscal side before elections then we could see the pair inching towards 72-73 soon.
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