The continued devaluation of the Chinese yuan and strong demand for the dollar from importers pushed down the rupee on Thursday, making it the biggest loser in Asia, amid fears of a repeat of 2013, when the Indian currency went into a free fall. After hitting a two-year low of 65.23 to the US dollar in volatile trading on Thursday, the rupee closed at 65.10, a decline of 32 paise.
The rupee has dropped 136 paise, or 2.13%, in the last seven trading sessions. A weak rupee will inflate India’s import bill — the country imports more than 70% of its crude oil requirements — and fan inflation. A falling rupee vis-a-vis the yuan also affects India’s trade with China. India has a huge trade gap with China, and there are worries that the yuan’s devaluation will tilt the balance further in China’s favour.
A weaker yuan has also raised concerns of Chinese goods being dumped more in India. According to experts, China’s move could trigger devaluations by other central banks and set off a global currency war.
Read: China devalues Yuan : What it means for India
The rout in the currency markets, sparked off by China’s announcement of its decision to devaluate the yuan on Monday, abated slightly on Thursday after the Chinese central bank tried to soothe ruffled nerves by reiterating that the move was not aimed at boosting exports.
“The rupee continues to reel under the effect of the devaluation of the yuan. The stalled reforms due to the deadlock in the Parliament added to the situation. However, expectation of a mid-policy rate cut has offered some cushion,” said Anindya Banerjee of Kotak Securities.
On August 11, the People’s Bank of China adjusted the yuan’s daily reference rate 1.9% lower and further devalued it by 1.6% on Wednesday, to align the rate with the market level. On Thursday, the yuan was again devalued by 1.1%.
In its commentary on China’s move, global banking major UBS said it is unlikely that the Chinese government will let only market momentum drive the exchange rate from now on. “We think the government may still want to take a relatively cautious approach on the exchange rate. The upcoming SDR review (at the IMF) is one consideration, and avoiding destabilising depreciation expectations and capital outflows would be more important. In this context, how China sets its daily fixing and manages forex market flows in the next few days will be very telling.”
Read: What yuan devaluation means for China, other countries
A rise in the dollar can be detrimental for India, which makes payments for crude imports in the American currency.
Kotak’s Banerjee said the continued depreciation can be negative for the rupee.
The brokerage is looking at 64.00 as a support level and 65.50/60 as the resistance level.Citigroup said in a report that the surprise element associated with the yuan’s depreciation is likely to force investors to liquidate their positions across markets, which may weaken the rupee further.