After losing 113 paise or 1.6 per cent to close at 70.73 against the US dollar on Monday, the rupee opened with marginal recovery on Tuesday and was up 5 paise, trading at 70.69 to a dollar. The benchmark Sensex that had lost 418 points on Monday also recovered and was trading at 36,819 with a gain of 120 points Tuesday morning.
Why did the rupee fall?
The Monday’s rupee fall was the biggest single day fall in six years as it hit a five month low of 70.73. While trade war fears between US and China and a sharp fall in Chinese Yuan (breaching 7 to a dollar) hit the global market sentiments and decline in currencies, the political developments in India following the government’s decision on Jammu and Kashmir along with continuing outflow of foreign funds from Indian equities further weakened the rupee. Between July and August (till Monday) FPIs have pulled out a net of around Rs 20,000 crore from Indian equities.
What could be the fallout of weakening Yuan?
The biggest concern in the market was on account of Yuan falling below seven to a dollar on Monday to close at 7.03. Markets were concerned that China was devaluing its currency to support its export businesses and such a move could hurt the business interest of other countries. While a weakening Yuan provides competitive advantage to Chinese exporters, it puts other countries and their exporters at a disadvantage as their exports become relatively uncompetitive, from the price aspect.
A weakness in Yuan comes after the country witnessed its worst gross domestic product growth numbers in 25 years, at 6.2% in the quarter ended June. While the slowdown in GDP numbers are learnt to be a result of a fallout of trade war with the US and overall slowdown in global growth, many feel that China may be devaluing its currency to boost its exports and push growth.
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