Indian's relation with Turks have deep roots in history, memory, culture and society. Their political relations can be traced back to different phases in past centuries, such as the Ottoman Caliphs and Sultans who had direct links with their counterparts. Muslims in India along with the support and cooperation of the Hindus have a history of political and financial support extended to Turkey not less than five times during 1874-1920. The father of the Indian nation Mahatma Gandhi is well known for leading the Khilafat Movement in 1919 in which many Muslims and Hindus express their massive support to the Caliph Sultan against western interventionist forces.
The Turkish Lira has dropped almost 30 per cent in the last month. The Indian rupee, too, has fallen to pass Rs 70 to the US dollar for the first time. Does the Turkish crisis pose a significant threat for India?
No and yes. It is unlikely that the crisis in Turkey will affect India beyond the short-term. But yes, a crisis similar to this could easily strike India at some point in the future. Strengthening the rupee, to preserve India’s future economic growth, should be high priority for the Reserve Bank of India.
In global financial markets, bad news travels fast, resulting in collateral damage beyond its immediate point of impact. The 2008 global financial crisis started in the US, but spread globally as a result of complex interrelated financial instruments. This is called a financial ‘contagion’ and it stems from the collected response of investors to avoid risk and move to safer investments. This is akin to swimmers wanting to swim to the shore when the sea starts to get rough.
Turkey’s crisis will impact countries like India because these two countries get clubbed together as emerging countries in most investment models. So, when investors start dumping Liras, the rupee gets swept along in the selling. A falling Lira increases the risk of bankruptcies as Turkish companies (and the government) would have a harder time paying back their foreign-currency denominated loans. This puts a shadow on other emerging countries like India which also have substantial dollar-denominated debt.
India’s external debt on March 2018 was $530 billion or about 21 per cent of GDP, more than two and a half times that of Turkey. Overseas borrowing for Indian companies and the government has increased dramatically over the last two years, in response to higher domestic interest rates and tightening liquidity from the banking crisis. A drop in the rupee increases both the interest cost of this borrowing and the residual principal. So, a ten per cent drop in the rupee increases interest payments and the value of the unpaid principal by ten per cent. This is a substantial cost. What makes the decline in the rupee even more problematic is that 42 per cent of India’s foreign debt is short-term. Repaying back this loan with a depreciated rupee would severely impact the balance sheets of Indian borrowers. That is the short-term cost of the Lira crisis for India