Currency war: Rupee sailing against Yuan tide

Ever since the beginning of this year, stock markets and the Indian rupee have continued to slide. The Indian currency has been gripped by Bears in recent times as global markets went into another tailspin along with China’s yuan devaluation that has triggered a capital flight from the emerging markets.

Rout in rupee continues as it has breached the 68 level against the US dollar for the first time in 28 months, with a sharp sell-off in equity markets causing fears of dollar outflows.

The Indian rupee is on the slide

The Indian currency is basically following the weakness seen in the rest of the Asian currencies. China’s yuan devaluation has come up as a major factor, hurting the sentiments globally. China has been witnessing a slowdown, with the International Monetary Fund has reiterated and while slashing the global growth forecasts for the third time in less than a year. IMF has cited a sharp slowdown in China trade and weak commodity prices that are thrashing Brazil and other emerging markets.

So far this calendar year, the rupee has fallen 2.7 per cent against the dollar, triggering to a substantial capital flight from the local equity markets. Overseas investors have pulled out close to Rs 7,146 crore crore from the Indian equity markets since the start of this year.

However, if this selling pressure from FPIs persists till the global mood stabilises, the rupee would soon hit its 2013 record low of 68.85 a dollar and perhaps even further plunge towards 70.

Why sliding rupee is not a concern?

However, there is still a silver lining. The rupee is still relatively stronger against its trading partners and the Reserve Bank of India is well placed with the firepower in the form of over USD 350 billion in reserves to defend the sharp depreciation in the rupee if needed

China rout: A worry for India

Yes, it’s China once again!

Stock markets globally took a hit last week after the Chinese central bank devalued the yuan sharply, a move that led to such a sharp decline in the Chinese stock market that trade had to be suspended twice.

China’s move to devalue the Yuan to the lowest level since March 2011 rattled investors. India too could not help falling prey to a global tsunami that wiped out more than USD 4 trillion from equities worldwide this year, reigniting fears of a fresh global currency war while signalling heightened worries over the health of the Chinese economy.

Indian markets hit Chinese wall

The People’s Bank of China lowered the value of the Chinese currency by 0.51 per cent to 6.5646 against the US dollar, putting stock markets and currencies worldwide under pressure.

The 30-share benchmark index, Sensex lost 4.68 per cent over the week, which made it the worst start to the calendar for the markets since the 5 per cent crash in the 30-stock pack in the first trading week of 2009. Even the weekly fall was at its worst in over four months.

Yuan decline to hurt India’s flagging exports

A continued devaluation of the Yuan by China may come as a further blow for the country’s exporters already reeling under the effects of a global slowdown, weighing on the outlook for Asia’s third biggest economy. India's exports have already been in a contraction mode for the past twelve months, plunging by 18.46 per cent to USD 174.3 billion year on year in April-November 2015, a sign that India isn’t immune to the current bout of global volatility amid a faltering Chinese economy, disinflation risks and the start of the US Federal Reserve’s interest rate tightening cycle.

Moreover, Yuan’s devaluation may also boost Chinese imports to India by making them cheaper, hurting domestic manufacturers.

The recent depreciation may also trigger a fall in rupee to keep it competitive in the export market.