Emerging currencies catch the chill; experts say RBI didn’t intervene and markets overreacted
The rupee fell by Rs 1.09 to close at an all-time low of Rs 69.93 to the dollar, with investors dumping the emerging market currencies for safe havens such as the US dollar and the Japanese yen after the Turkish lira nosedived.
Reserve Bank of India was conspicuous by its absence in the forex market. The central bank intervenes through the banks, which sell dollars in the forex market.
The Indian markets may have over-reacted after the Turkish President Tayyip Erdogan’s stiff control of the economy and worsening diplomatic rift with the US sent the lira plunging, experts said.
“The lira sell-off started on Friday itself, but caught India and other emerging markets off-guard today with FIIs selling and some amount of hedging coming in. RBI was, however, absent in the market, giving the feeling that the central bank will intervene only if the rupee is impacted,” said M S Gopikrishnan, head, financial markets, Standard Chartered bank.
The diplomatic stand-off between the US and Turkey reached a flashpoint after the US hiked the tariffs on aluminium and steel, two of the major export items of Turkey, by 20% and 50%, respectively.
“Just as INR markets appeared to be settling on the back of strong RBI intervention the past few days, the fall in the Turkish lira and the South African rand triggered a sharp sell-off reversing the recent trend. FPIs may have bought US dollars today to hedge their India positions,” Ananth Narayan, a forex expert and professor at SP Jain Institute of Management.
“India is not Turkey and the markets seemed to have overreacted today. However, we do have our vulnerabilities of an unhealthy external balance, tricky fiscal deficit and banking stress,” Narayan said.
Inflation, the major worry in the Indian economy, also cooled, giving strength to the belief that the Indian markets still have an inherent strength to withstand global headwinds. SBI, in its economic report Ecowrap, said, “The retail inflation has come as a breather and has declined substantially to 4.17% from 4.92% (downwardly revised) in June.”
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