As stock markets across the world tumbled last week on worries over a cheaper Chinese yuan, from individuals, traders, companies to policymakers all seemed to have one question in mind: Will India’s currency and equity markets plumb fresh depths? The immediate reason for China’s decision to devalue the yuan is to aid its exports. Struggling to claw out of its worst slowdown in more than a decade hit by shrinking exports — the edifice of its growth story — China’s central bank in August had first devalued the yuan to its lowest value in three years. This is aimed at making its manufactured products cheaper and help exports race ahead of competitors in a wobbly world market. The yuan has fallen 6.5% since August.
The Chinese government has guided the yuan lower over the past several weeks. This is seen as an indication by the Chinese authorities that a further depreciation of the yuan could be in the offing to boost flagging exports. Other things remaining same, under this system, a weaker yuan will push up exports and vice versa. Over the last six months the dollar has strengthened against most major currencies, reflecting incipient recovery signs in the world’s largest economy. Almost by default, this had also strengthened the Chinese yuan.
The fall of the rupee and equity markets in India on Thursday are signs of anxiety about the likely impact of the yuan’s devaluation. There are fears that a weaker yuan has raised concerns of dumping — when goods are exported at prices far below what is charged in its home market, or its cost of production. Imports from China have jumped by one-fifth to $60 billion in 2014-15, compared with a year ago, while exports have plunged to $12 billion, leading to a huge trade gap between the two countries.
The silver lining is that amid sputtering global conditions, India is set to become the world’s fastest-growing major economy by 2016, ahead of China. A new World Bank report has said emerging market economies that led the global recovery from the 2007-8 financial crisis are slowing down, with one exception, India. It called India-led South Asia a ‘bright spot’ in an otherwise gloomy outlook for emerging markets, using a phrase that has been used regularly in the recent months for India. That said, it would be imprudent to not keep an eye on the developments in the foreign exchange market. The risk of a string of devaluations by other central banks to help their exporters is too real to ignore.