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Contagion from Turkish Lira Report – August 2018

Some key highlights:

  • INR witnessed a sharp drop, owing to the contagion effect from Turkey’s economic turmoil
  • Extreme moves in countries like Turkey, however, don’t last too long. Globally synchronized attention to the risks (currently emanating from Turkey) and policy actions should follow soon
  • Our economists recently penciled a probability of INR touching 71, which may be healthy given its relative overvaluation
  • One should be prepared for are two scenarios:
    • Crude Price Shocks - Crude moving beyond USD80-90 levels, which not many are forecasting. If that happens, India’s macro can deteriorate quite sharply, and INR can give up its entire relative overvaluation
    • Global Interest Rates & Monetary Policy Accommodation - The policy accommodation by US is already being withdrawn and ECB will soon move in the same direction, which shall result in twin effects of higher rates and lesser dollar liquidity. These are likely to exert pressure on EM currencies.
  • If the above comes true, an export oriented portfolio shall outperform significantly, notwithstanding its recent history, as it is cheaper than the market and can benefit from any volatility in INR