INR: Opens stronger at 69.83 as against yesterday close of 69.93 and range for the day is 69.50 to 70.20.
Yesterday, most EM currencies were weaker on concerns of massive fall in TRY (18% on Fri; 80 % since Jan and also 214% in last five years).
Yesterday INR opened 69.49 and traded with one way weakness trump the day. Rbi intervention was near nil. Our sense is that INR was trying to catchup with weakness in other currencies like IDR which opened even more weaker. Interbank players would have further added to their long USD positions. For them till now long USD is making money, after a long long time. And therefore it would take real change in global narrative for INR reversal to start.
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Going ahead, the worrying part is that it is just start of crisis in Turkey. Many many tings may fall out because of TRY weakening and rising acrimony between Turkey and US:
1. Spate of corporate defaults. Turkey has USD of external debt. For borrowers, the debt is now almost double in last few months amidst slowing economy. The external debt is USD 500 bn– almost 53% of GDP and it is about 4 times of reserves.
2. Spill over effect on EU zone recovery
3. Further cracks in geopolitical balance if Russia gets into the muddle and bail out Turkey
For India, there is not much relation with Turkey. However the relation comes from risk aversion of investors. They view all EM in a similar way. The other emerging concern is that for us also, external debt growth is more than growth of reserves. As of now, the balance seems OK. But at the speed of growth of external debt, in few years, the whole think may look very shaky. We shall soon be publishing a report on this aspect.
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On the other hand from macro economical front, India’s numbers are coming good – healthy IIP and lower inflation. Retails inflation stood at 4.17% in July from a revised of 5% in June on back of decline in food inflation including vegetables and sugar. However energy and housing inflation continued to surge. RBI in its last meeting last hiked it’s key rates by 25 bps to 6.50% for 2nd consecutive time since Aug’ 18. For rest of this FY 18, RBI may maintain a neutral stand if inflation remained near to 4%.