DSIJ Explains: Turkey currency crisis

The external value of rupee is currently trading at its lifetime low. It crossed the important psychological level of Rs. 70 per US dollar on August 13, 2018. It reached the level of Rs. 70.67 per US dollar on Thursday (August 16, 2018) trade. The irony is that fall in the rupee has nothing to do with any substantial deterioration in the Indian macroeconomic condition. It is a reaction to sharp depreciation (40 per cent the year till date) in Turkey currency, Lira.

The Turkish economy of late has not been in the best of health and is suffering under high inflation (16 per cent in July), current account deficit, high private sector and banking debt. Nevertheless, what impacted it now is US sanctions on Turkish steel and aluminium. Additionally, the Turkish central bank has shown resistance to sharply raising interest rates to address inflation issues and currency weakness. The interest rate in Turkey is currently at 17.75 per cent. Weakness in the lira has negatively impacted other emerging market currencies, including the Indian rupee.

A depreciating rupee will impact the government’s fiscal math adversely. It will widen the trade deficit, which may further put pressure on the rupee. For the month of July 2018, the trade deficit has expanded by 57 per cent on a yearly basis and 13 per cent on a sequential basis. The total trade deficit for the month of July was US$ 18 billion.

The Indian economy has very limited exposure to Turkey and hence in terms of economic activity, we will not be impacted much. For FY18, Indian exports to Turkey was only 1.7 per cent of India’s total exports and was to the tune of US$ 5 billion. The imports are even less to the tune of US$ 2 billion and remained at 0.45 per cent of total Indian imports. Even in terms of listed companies, there are hardly any companies that have substantial exposure to Turkey.

Although, a sharp depreciation in lira will not have much impact on our economy, strengthening US dollar, depreciating yuan and tightening US monetary policy may have a negative impact on the Indian economy.

The current fall in the rupee will have also an impact on RBI’s monetary policy. The RBI may have to tighten the policy rate further to arrest the fall in rupee.