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Rupee plunges to record low of 70 against the greenback, and the latest joker in the pack is Turkey

The rupee is back in the limelight and has in a way become more important than the stock market as the latter is being driven by the former of late. The 70-mark has been breached which is more psychological in impact than real as it is likely that when the storm passes, the exchange rate will revert to the 69-level. But the fact that it is over 70 can unnerve the market.

The rupee has been volatile for quite some time now but the sense one gets is that this time it is different. During this year, there have been different phases of the rupee fall with each one feeding into the other.

To begin with, it was the Fed which took action on interest rates and indicated that there would be several more hikes during the year. This was a shock of an economic nature which took the rupee down.

The second was the oil issue which hinged on the OPEC action and as the price went towards $80 a barrel, the rupee tumbled once more and here the fundamentals caused the downfall.

Third, was the issue of Iran where sanctions came in which was a combination of both fundamentals and sentiment as oil got pressured as also the expectations that the world economy could get impacted.

The fourth was the US decision to start shooting all those who indulge in unfair trade practices starting with China and the EU too, not spared. ‘Make America great’ meant that trade had to be fair with the US setting the definitions. This caused the rupee to falter again and India too could get targeted was the market view.

Now the latest joker in the pack is Turkey and the story is quite straightforward and simple which has become a political issue with strong economic consequences.

A US pastor who has been imprisoned in Turkey has been the centre of attention where the US President has called for his release. As Turkey has not agreed on the same, the US has announced sanctions as well as doubled tariffs on goods from Turkey. This has caused the Turkish lira to crash which has had collateral effects on all emerging markets currencies.

Hopefully, this will not be permanent and presently the shock element is more because it was unexpected.

Interestingly, this comes at a time when the fundamentals of the rupee are better than they were a couple of months back. While the trade deficit is widening, it is not due to oil but growth taking place which has caused non-oil imports to increase.

Foreign Portfolio Investments (FPIs) which were negative have turned positive which is a good sign for the economy because there was the concern of flight of capital due to the Fed action. The fact that they have turned positive means that things will improve as funds rebalance their allocations across countries. In fact, interest rates have been hiked by the Reserve Bank of India (RBI) twice to make bonds attractive in terms of returns. Also, the forex reserves at around $400 billion look comfortable to cushion shocks in the near term.

 Rupee plunges to record low of 70 against the greenback, and the latest joker in the pack is Turkey

Representational image. Reuters.

Therefore, to conjecture where the rupee will go, it is necessary to take a call on when the problem with Turkey will be sorted out. The important thing is that markets will be terribly volatile until action is taken by the US after which it will be returning to normalcy. As long as there is dialogue with no conclusion the rupee will tend to get wobbly and this is where the RBI has to be alert.

While the RBI has been selling dollars in the market in the past to the extent of $ 15.4 billion till June, it has to ensure that traders don’t try and profit by taking long and short calls. Typically, exporters will delay bringing in dollars to reap higher rupee benefits while importers will rush in to buy dollars to cover their imports in the future. This is a normal reaction which makes currency depreciation self-fulfilling.

Presently, it should be realised that the fundamentals of the forex position are fairly strong but the sentiment is weak arising from external factors over which we may have less control. Therefore, any intervention through infusion of dollars may not really help and we will have to wait for the crisis to blow over. Volatility is hence here to stay and cannot be eschewed in the short run. As long as the fundamentals stay resilient, which appears to be the case, the rupee should return to the Rs 69/$ levels, though the timing will be hard to conjecture.

But a volatile rupee will have implications not just for the stock market but also bond market as the RBI will be weighing its options that can have an impact on liquidity. Selling dollars at a time when liquidity is not easy and has its implications as they have to be countered by open market operations (OMO) too. One would expect the RBI to watch carefully for a fortnight or so before stepping in. Meanwhile it can be hoped that the proverbial dust settles.

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Updated Date: Aug 14, 2018 13:12:38 IST