The Indian rupee hit an all-time low of Rs. 69.62 against the U.S. dollar following the currency disorder in Turkey. The Turkish lira has been on a free fall, dropping 12% on Monday morning. Last week, on Friday, the currency slipped 16%, and over the past 12 months, the currency lost over 50% of its value, indicating something majorly wrong with the economy.

 

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What’s wrong with Turkish lira?

The Turkish economy has been going through a rough patch for quite some time now, and the situation has only worsened lately. The inflation rate of the country peaked at 15.9% in July. To give a clearer idea, the inflation rate of India for June came in at 5%, triggering a revision of the policies from the Reserve Bank of India (RBI).

Coming to the debt part, Turkey’s current account deficit (CAD) is touching 5% of its gross domestic product. A higher CAD to GDP ratio is a huge burden to the economy. For India, CAD is around 2% of the GDP, due to a spike in the import bill on the back of rising crude oil prices.

Turkish President Tayyip Erdogan, who carries firm control over the economy and calls himself the “enemy of interest rates,” is keen to get cheap credit from banks to spur growth. However, investors fear from overheating of the economy.

Investors are worried that the Turkish companies, which borrowed heavily to gain from the construction boom, may fail to pay back in dollars and euros as the weakened Turkish lira means they will have to pay more. According to Reuters, over a third of Turkish banks’ lending is in foreign currencies.

Explaining the problem with the Turkish lira, Edward Park, investment manager at Brooks Macdonald, notes that Turkey has tripled its U.S. dollar liabilities over the last ten years. However, with the U.S. changing its stance and talking about tightening liquidity and raising rates, it has become difficult for the emerging markets to finance in U.S. dollars.

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