NEW DELHI: Investors on Monday morning were in for a jolt as the equity and money markets slumped resulting in double trouble. The benchmark equity index BSE Sensex, which has risen more than 11 per cent since the turn of this year, slumped nearly 300 points in morning trade. In an even striking development, the rupee hit an all-time low of 69.62 against the US dollar. Both the gauges have recovered to some extent in mid-day trade.
However stretched the co-relation may seem to the common man, the bout of negative sentiment was caused due to a currency rout in Turkey.
WHAT HAS GONE WRONG IN TURKEY?
Turkey's currency, the lira is in a free fall. The currency fell more than 12 per cent on Monday morning. It had slipped 16 per cent on Friday and by one-fifth in the entire last week's trading. The erosion however has been consistent, with the lira tumbling 50 per cent over the last 12 months.
WHY IS THE LIRA SLIPPING?
Turkish economy has been in the doldrums for some time now, and it has worsened further due to a recent trigger.
The country's inflation rate touched 15.9 per cent in July. To put that in perspective, India's inflation for June stood at 5 per cent and it called for policy revision measures from the Reserve Bank of India (RBI) and other quarters already.
Turkey's debt scenario is in bad shape too. The current account deficit (CAD) of the country has now reached 5 per cent of its gross domestic product (GDP). CAD is the deficit that a country runs into, when it imports more than it exports goods and services. A greater CAD-to-GDP ratio is thus a burden on the economy. India's CAD is hovering around 2 per cent of its GDP -- under pressure from a fattening import bill due to costly crude oil.
On Friday though, the the country's finances received a body blow after US President Donald Trump announced he was doubling US import tariffs on Turkish steel and aluminium.
WHY SHOULD INDIA BE WORRIED?
The slump in lira sparked fresh concerns in the global markets which has already been jittery with rising noise around a trade war. Indian investors have more reasons to worry as emerging economies ( including India) seem most vulnerable in face of the lira erosion.
Much like the rupee, India's BRICS ( an acronym for an association of five major emerging national economies - Brazil, Russia, India, China, South Africa) counterparts felt the heat on Monday. The Russian ruble, already under pressure after the US hit Moscow with sanctions last week, lost two per cent, while the South African rand was battered seven per cent. China's yuan was somewhat immune, even though it fell by almost half a per cent.
“China’s economy is now slowing, emerging markets are now tightening monetary policy and the trade war is escalating. This could worsen investor sentiment towards emerging markets and also strengthens our view that emerging-market growth will weaken,” news agency Bloomberg quoted William Jackson, chief emerging-market economist for Capital Economics in London, as saying.