There is a political crisis in Turkey. Yet it’s impact is felt as far away as Toronto, Tokyo and India. Today, the Indian rupee, vis-à-vis the US dollar fell to a new life time low and thanks to RBI intervention was rescued from a further free fall. But it’s like a band-aid solution as the crisis or wound is much bigger to be contained.

So what exactly is happening in Turkey? It all stems from their President, Recep Tayyip Erdogan. For 15 years, he did do a good job by arresting the falling Turkish currency, the lira , bringing down inflation, helping the economy grow by 60% and also helped bring about a peace agreement in the SE region of Kurdistan.

But then there was a failed coup attempt in 2016, followed by a series of terrorist attacks rising from the fragile Kurdish peace. Once Erdogan regained power , his Govt became extremely conservative, shutting down media outlets, arresting judges and opposition lawmakers and dictating terms to the central bank when it came to policy making. Erdogan forced banks to lend more to boost demand and economy while forcing the central bank to cut interest rates. And that led to what was expected – surge in inflation, decline of the Lira, falling stock market.

So the crisis that Turkey faces today is a sum total of many events. First, the unrelenting borrowing at low costs had led to a situation of mounting bad debts with companies struggling to repay loans, especially in foreign currencies like Euro and dollars. And now with the falling Lira, the debt shot up further.

Of Donald Trump aggravated the situation. An American pastor, Andrew Brunson has been detained for over two years by Turkey for his alleged links to political groups. Trump reacted by issuing sanctions last week. And then on Friday, Trump tweeted saying that he had approved the doubling of tariffs on Turkish steel and aluminium. Erdogan on the other hand, showed that he is unperturbed. After the sanctions, his only reaction was telling his supporters that there was no cause to worry as overseas investors might have the dollars but the Turks had Allah.

Relly, at the root of this economic crisis in Turkey is the control of Erdogan over central bank, which has lost its independence to make economic policy decisions. In a country where the leader tells the central bank where the interest rates should be, surely the fall is inevitable. But Erdogan is unmindful and last month, he said only he has the power to appoint bankers that set interest rates and promptly appointed his son-in-law in charge of economic policy.

Even from here, the situation could be reversed, if and only if, Erdogan gives up his penchant for low interest rates and allows real bankers to make decisions. Many say that even if Erdogan and Trump talk, reach a truce, the situation could be salvaged. But at this point of time, it seems unlikely and in all probability, Erdogan will prefer to wait it out – who will blink first.

So for now, the emerging markets will face a currency crisis and an overall situation of unease. RBI will have to work doubly hard and lets see, how far south the rupee heads. Murmurs of Rs.70 and even Rs.73 are getting louder.