Almost overnight the odds are loaded against the rupee. Just a few days back, India was the poster boy of good macros. With two back to back rate hikes even though inflation has fallen to 4.17 percent and crude falling from a feared 80-plus to the 72 mark, most funds and traders were loaded with long rupee bets.

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This week those bets came bad. The Turkish lira's fall was only part of the reason, probably just a trigger. It pushed the euro down because of huge European bank exposures to Turkey. That strengthened the dollar, pressuring all emerging market currencies. The Indonesian rupiah and the Indian rupee were the worst affected.

On Tuesday night, after a day when rupee fell to a low of 70 against the US dollar, the government announced the July trade numbers which showed a trade deficit of 18.02 billion dollars, a six year high. If monthly deficit for the rest of the months of the year are as high, India’s current account deficit can rise above 3 percent, perilously close to Turkey's 5 percent CAD.

With most traders long on rupee over the last 8-12 weeks, on Wednesday the offshore banks saw huge demand for dollar from rupee traders. The foreign banks which supplied as much as one billion dollars in offshore on Wednesday, couldn’t cover from India as the market was closed(Offshore market is already indicating that rupee may open at 70.70 on Thursday).

That big demand for dollars from offshore banks early morning on Thursday can take rupee to 71, unless RBI intervenes. To add salt to the injury, on Wednesday the dollar index strengthened even more in spite of the lira recovering. The DXY touched 96.86. In response, the CNY fell to 6.91. Indonesia raised interest rates to stop its currency from falling for the third day In a row.

Usually, RBI doesn’t intervene when rupee is falling to global cues but if it allows rupee to fall this time, it can become a slippery slope.

Bond yields too may rise due to the weak domestic currency. The market will start pricing another hike by RBI to slow down the economy so that the imports don’t surge and widen the deficit.

All told, a stormy day ahead for rupee, a little less wobbly for bonds. How can shares be calm?

First Published:Aug 16, 2018 6:25 AM IST