Turmoil in Turkish currency impacted emerging markets with the rupee plunged 1.09% on Monday to hit a record low of 69.93 a dollar, as compared to previous close of 68.84 - thus registering the biggest single day fall in five years.
The Turkish lira weakened over 8% on Monday, following concern over its president Tayyip Erdogan's increasing control over the economy and worsening diplomatic relationship with the United States.
"Rupee fell to fresh record low levels after Turkey’s widening diplomatic spat with the US prompted fresh turmoil in the market. Strength in the dollar against its major crosses is also weighing on the Asian currencies including the rupee,” said Gaurang Somaiya, Currency Analyst, Motilal Oswal Securities.
The dollar index was trading higher at 96.18.
The Indian currency which opened stronger against the dollar but reversed gains shortly to plunge to 69.62 a dollar in the first hour of trade. Dealers said the central bank intervened to slow the pace of fall but it is unlikely that there could significant intervention as factors impacting the currency are coming from external sources.
“Given that the contagion is spread across the emerging markets, the RBI is unlikely to defend a particular level -- 69.0 had emerged until today as a de-facto tolerance level—come what may,” Tushar Arora, senior economist at HDFC Bank said in a note.
Mr Arora said while rupee may made a ‘brief foray’ into 70 a dollar in such volatile trading environment but holds on the September end call of 68-69 a dollar and see the current weakness as a strategic trading opportunity.
A weakened rupee will make exports competitive.
“The fall in the rupee is not that dramatic that it should be worrying,” said U R Bhat, managing director, Dalton Capital Advisors India.
“Historically the rupee has seen a fall of 5-6% CAGR so this kind of fall is factored in. Foreign investors investing in government bonds or fixed income may however feel some impact. But the fall provides a big opportunity for exports especially at a time when trade wars are happening. This is a good time to make our exports more competitive,” Mr Bhat added.
The weakness in in rupee spilled over into equity with the 30-share Sensex lost 224.33 points or 0.59% to close at 37,644.90 as 20 of the constituents ended the day in the red. The second straight session of losses saw banking majors like State Bank of India, Axis Bank, HDFC Bank, Yes Bank and ICICI Bank all losing ground as the Turkish currency crisis affected investor sentiments globally with the domestic market getting further spooked by a record fall in the rupee.
The broader Nifty ended the day at 11,355.75, down 73.75 points or 0.65%. Incidentally, the India VIX, which reflects the short term volatility in the market, rose over 4% on Monday.
With the benchmarks losing heavy ground, the overall market breadth turned extremely negative with more than 1,700 stocks declining as against only 954 gainers.