Indian rupee: Turkish lira crisis risk to emerging markets

A
man displays the new 2000 Indian rupee banknotes after
withdrawing them from State Bank of India in
Agartala
Thomson
Reuters

India’s currency hit an all-time low Monday, signaling that fears
surrounding a crisis in Turkey could spill over into other
markets. 

The rupee fell to 70.0850 versus the dollar at 9 a.m. ET. The
sharp slide will likely lead the Reserve Bank of India to
intervene, sources told
CNBC. 

Jameel Ahmad, global head of currency strategy and market
research at FXTM, said the rupee fell “as a result of the risk
off atmosphere across global markets.” A sharp selloff in the
Turkish lira last week has raised concerns that a currency crisis
in the country, which holds large amounts of foreign debt, could
spread to surrounding markets. 

“Global markets and news headlines across the world are once
again being completely dictated by the ongoing events in Turkey,”
Ahmad said. “The Turkish Lira has entered another round of
currency freefall, with the ongoing volatility dragging down a
wide host of currencies across the world.”

Turkey’s currency plunged more than 18% against the dollar
Friday. It continued to slide Monday morning, shedding as much as
9%, with no end to the selloff in sight. It has lost about 40% of
its value in August. President Recep Tayyip Erdogan, who has
wielded more influence over the central bank this year, doesn’t
believe a traditional economic theory that raising interest rates
will slowdown inflation.

“The TRY is in a full-blown currency crisis as the number of
negative stories increases,” Nordea analysts Morten Lund and
Tuuli Koivu wrote in a note. 

Concerns about the lira have already hit other emerging market
currencies, analysts say, including the South African rand,
Russian ruble, and Mexican peso. 

Turkey’s main banking regulator will no longer allow foreign
exchange operations of financial institutions to exceed 50% of
their equity, according to a Sunday announcement
on its website. Garanti Bank, one of Turkey’s largest
private financial institutions, announced Monday it won’t allow
any customers to open any new foreign exchange positions.

Also on Monday, data showed Indian consumer price inflation was
sharper than the consensus had expected. But that was mainly due
to a “dramatic drop” in food inflation, according to Capital
Economics economist Shilan Shah.