The Chinese central bank effected a 2% devaluation of the yuan on Tuesday, raising the spectre of a currency war and sending global stocks tumbling despite a fresh Greek debt deal as a stronger dollar hurt commodity markets.
The surprise move meant to support flagging economic growth in China will further dent the competitiveness of Indian exports as Chinese goods become cheaper, aided by a weaker currency even as investors fret over underlying economic weaknesses.
“India already has a huge trade deficit with China and this devaluation is likely to push the deficit further up as cheap imports will be initiated by Chinese manufacturers irrespective of dumping safeguards,” DK Joshi, senior director and chief economist, CRISIL, told HT.
China has long resisted calls by international trade partners to free up the exchange rate and allow the yuan to strengthen, reflecting growth in the world's second-largest economy.
Finance secretary Rajiv Mehrishi said China seemed to be moving towards a flexible exchange rate.
Read: Rupee tumbles to 2-mth closing low, down by 32 paise at Rs 64.19
"It should have some impact on our exports. It may also have an impact on FDI if China becomes a more attractive destination vis-a-vis India," he said, adding the rupee was still stronger relative to most other currencies.
A bigger worry than exports being hit is the possible impact of cheaper imports flooding the Indian market.
“Our market, already flooded with cheap Chinese goods, will see even higher imports of steel, power equipment and other products, which will hurt domestic manufacturers,” a senior government official said.
SC Ralhan, president of the Federation of Indian Export Organisations, said the devaluation would hurt India’s exports not only to China but to other countries as well because the competitiveness of Chinese exports to those economies would rise, too.
“This may swell the trade deficit further, which is touching $50 billion. China already has excess capacity in diverse sectors of manufacturing,” he said.
Ralhan cautioned against a possible currency war breaking out across the globe as huge depreciation in several currencies has already been undertaken in the recent past.
Saugata Bhattacharya, chief economist, Axis Bank, said while the initial impact on the rupee was negative, it could also turn out to be a positive for India.
“The move will weaken commodities further and push down prices, which will help India. Our forecast for the rupee has been that there will be a steady deterioration and it will reach 64.50 to the dollar by December-end. Recent developments may push it to 64.55 but it depends on how investors react,” Bhattacharya said.