The nearly 2 per cent devaluation of yuan, announced by China’s central bank on Tuesday — to support the country’s falling exports that fell 8.3 per cent in July — could not have come at a worse time for India, given that its overseas shipments had contracted for the seventh consecutive month in June its industries like steel and tyres are reeling under cheaper Chinese imports.
China devalued the yuan on Tuesday after a run of poor economic data, guiding the currency to its lowest point in almost three years. The central bank described the move as a ‘one-off depreciation’ of nearly 2 per cent. On Tuesday the yuan closed at 6.32 against the dollar, compared with Monday’s closing of 6.21.
The devaluation rocked the Indian currency market with the rupee plunging by 32 paise to close at nearly 2-month low of 64.19 per dollar amidst fears that the Chinese move will affect India’s export earnings and Indian firms operating in China. The benchmark Sensex at the Bombay Stock Exchange, too, fell 0.85 per cent or 235 points on Tuesday to close at 27,866. Commenting on the move, finance secretary Rajiv Mehrishi was quoted by PTI as saying that China seems to be moving towards flexible exchange rate.
“In my opinion it should have some impact on our exports. Exports from China would be cheaper,” he said. “It may also have impact on FDI if China become more attractive destination vis-a-vis India.” “Investors would go there where with the exchange rate he will get more kick for his dollar. So we have to see the impact,” he added.
According to experts, China’s move signals that there is more instability to come. “… the bigger concern now is that China may take more such measures and may further devalue its currency that will impact rupee,” said Jamal Mecklai of Mecklai Financial.
The devaluation will affect India’s exports not only to China but to other countries also with increasing competitiveness of Chinese exports, said SC Ralhan, president, Federation of Indian Export Organisations. “This may swell the trade deficit further, which is already touching $ 50 billion, as imports from China may increase particularly as China is having excessive capacity in diverse sectors of manufacturing,” he said.
In fact, several India companies that get impacted by Chinese exports came under pressure on the bourses. The biggest losers though were the tyre manufacturers in India who are already getting impacted by the rising demand for cheaper Chinese tyres in India markets. Shares of tyre companies took a hit of up to 12.5 per cent on Tuesday following the news.
Ralhan said that the devaluation may lead to a currency war as can be seen by huge depreciation in numerous currencies such as euro, Japanese yen, Brazalian real, Turkish lira, etc. “The volatility will increase the hedging cost for Indian exports also,” he said. “Chinese demand for Indian goods is likely to contract further due to the decline in the overall demand in the world’s second largest economy,” India Ratings said in a report.