Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

Rupee Rebounds From Record Low As Emerging Market Rout Eases 

The Indian rupee rebounded from record lows as the contagion from the economic crisis in Turkey remained relatively contained in developed markets overnight. The local currency opened 0.2 percent higher to 69.78 against the U.S. dollar today.

Yesterday, it fell as much as 1.6 percent, the most since September 2013, to close at 69.93 versus the dollar. The Indian currency has been the worst performer in Asia this year.

“The move is obviously related to what happened with the Turkish lira and the lack of confidence in emerging markets,” said Bhaskar Panda, vice president of HDFC Bank Ltd.'s treasury advisory group.

Rupee Rebounds From Record Low As Emerging Market Rout Eases 

The lira slumped for the fifth day to a new low after President Recep Tayyip Erdogan showed no signs of backing down in a standoff with the U.S. The MSCI Emerging Market Currency Index slumped to its lowest in more than a year.

Also read: Lira Extends Slide as Erdogan Says Turkey in an Economic War

The Indian currency has lost over 8 percent this year over worries surrounding the U.S.-China trade war and Turkey's financial crisis. “It is only a matter of time before the Reserve Bank of India allows the rupee to depreciate more,” Dhananjay Sinha, head of research for institutional equities at Emkay Global, told BloombergQuint. The rupee could breach the 70-per-dollar mark, Sinha added.

The strategy appears to be that the RBI will allow the currency to drift lower gradually instead of a volatile movement.
Dhananjay Sinha, Head Of Research - Institutional Equities, Emkay Global

HDFC Bank's Panda disagrees. “We’ll see some more depreciation, but I think 69-70 seems too far-fetched,” he said.

Neelkanth Mishra, director in charge of equity research at Credit Suisse, said concerns over the rupee have abated. Despite making the largest one-day move in more than a year, the Indian unit is only tracking the U.S. dollar, he wrote in a note. “We are unlikely to see meaningful weakness and volatility specific to the rupee.”

Mishra admitted that Credit Suisse was “worried about the rupee since the beginning of the year”. Over the past few months, concerns on the rupee have reduced, he said, because gross inbound foreign direct investment flows picked up and capital flight in the form of net jewellery imports declined.

Turkey Contagion Fears Justified?

“Turkey’s troubles are unlikely to affect India much beyond a mild impact on the currency -- which, in any case, mostly reflects broader dollar strength,” wrote Abhishek Gupta, who covers India for Bloomberg Economics.

We expect the Reserve Bank of India to intervene to support the rupee. This should prevent further weakness unless the dollar continues to strengthen and volatility in the India’s stock market increases significantly.
Abhishek Gupta, Bloomberg Economics

Turkey is currently running “a very high inflation rate and the indebtedness of the private sector has doubled over the last decade,” JPMorgan Securities Senior Economist James Glassman told BloombergQuint. However, the contagion is unlikely to spread into broader markets, according to Glassman.

Because Turkey depends so much on external funding you can understand why this is becoming a currency crisis...This is not likely to spread around the world.
James Glassman, Senior Economist, JPMorgan Securities

While Asia is still largely insulated from the Turkey turmoil, what is apparent is that the deficit currencies such as the peso, rupee and the rupiah are more vulnerable when risk-aversion picks up and capital flows start taking a hit, Mitul Kotecha, senior EM strategist at TD Securities, told Bloomberg News.

Turkey’s central bank announced measures including reducing reserve requirements to stabilise the lira and improve liquidity in the banking system. The U.S.-Turkey relationship took a turn for the worse on Friday, after President Donald Trump imposed sanctions on Turkey for the detention of an American priest. Erdogan struck a defiant note in his speeches on Sunday, saying Turkey was ready to say "bye-bye" to its alliance with the U.S.