China on Wednesday devalued the yuan for a second
straight day, leading to over 4 per cent drop in its currency in two days. The
devaluation of the yuan strengthened the US dollar, most other currencies were
reeling for cover.
The Indian rupee sank to a two-year low of 64.95 per dollar on Wednesday; domestic stock markets also come under selling pressure.
Industry body Assocham said yuan's devaluation could lead to a full-fledged "currency war". For India, the devaluation in the yuan will prove to be a "triple whammy" as rupee volatility will increase, exports will come under pressure and there will be dumping of Chinese goods in India, it added.
Here's How the Yuan Devaluation Will Impact India:
1) Rupee volatility: The sharp fall in the rupee has already rattled stock markets, which fell for a fourth straight session today. If the rupee continues to fall sharply, imports will become costlier, stoking inflation. This will force the Reserve Bank to hold on to high interest rates, which will hamper the ongoing economic recovery. Since India runs a trade deficit (imports are more than exports), chances are the current account deficit will also rise, which will further pressure the rupee. Falling rupee is bad for those companies that have dollar-denominated loans and also for foreign flows because stock market returns become unattractive.
2) Pressure on exports: In normal course, falling rupee would have aided domestic exports, which have contracted for seven straight months until June 2015. However, analysts are betting against a rise in domestic exports because of a global slowdown. The fact that China and India compete for several export items such as textiles, gems and jewellery, etc. will also go against domestic exporters, analysts say. "The large overlap between Indian and China in markets and also products highlights the threat Indian exporters face from China," said DK Pant, chief economist of India Ratings and Research. The economic slowdown in China - which is among the top five countries for Indian exports - is another negative for Indian exporters, analysts say.
3) Dumping of Chinese goods: There's fear that the sharp devaluation in yuan will help China dump goods into the Indian market, which will impact domestic manufacturers. The fear is already playing out on the Dalal Street with tyre stocks and steel makers falling sharply over the last two days.
The Indian rupee sank to a two-year low of 64.95 per dollar on Wednesday; domestic stock markets also come under selling pressure.
Industry body Assocham said yuan's devaluation could lead to a full-fledged "currency war". For India, the devaluation in the yuan will prove to be a "triple whammy" as rupee volatility will increase, exports will come under pressure and there will be dumping of Chinese goods in India, it added.
Here's How the Yuan Devaluation Will Impact India:
1) Rupee volatility: The sharp fall in the rupee has already rattled stock markets, which fell for a fourth straight session today. If the rupee continues to fall sharply, imports will become costlier, stoking inflation. This will force the Reserve Bank to hold on to high interest rates, which will hamper the ongoing economic recovery. Since India runs a trade deficit (imports are more than exports), chances are the current account deficit will also rise, which will further pressure the rupee. Falling rupee is bad for those companies that have dollar-denominated loans and also for foreign flows because stock market returns become unattractive.
2) Pressure on exports: In normal course, falling rupee would have aided domestic exports, which have contracted for seven straight months until June 2015. However, analysts are betting against a rise in domestic exports because of a global slowdown. The fact that China and India compete for several export items such as textiles, gems and jewellery, etc. will also go against domestic exporters, analysts say. "The large overlap between Indian and China in markets and also products highlights the threat Indian exporters face from China," said DK Pant, chief economist of India Ratings and Research. The economic slowdown in China - which is among the top five countries for Indian exports - is another negative for Indian exporters, analysts say.
3) Dumping of Chinese goods: There's fear that the sharp devaluation in yuan will help China dump goods into the Indian market, which will impact domestic manufacturers. The fear is already playing out on the Dalal Street with tyre stocks and steel makers falling sharply over the last two days.
Arvind
Subramanium’s Views
World economies, including India, will have to
take note of Chinese currency devaluation designed to avert slowdown in its
economy and exports, Chief Economic Advisor Arvind Subramanian said on
Wednesday.
"There is no doubt that China is responding to its own internal development of slowing down of growth and exports in order to give its economy a boost. All of us policymakers around the world, including India, have to take notice of this action," he told reporters here.
Mr Subramanian, however, refused to comment on the impact of yuan devaluation on India and its exports.
China's central bank yesterday devalued its tightly controlled currency by close to 2 per cent to boost exports, amid a slowdown in the world's second-largest economy and the recent stock market crash.
Even global exports are on a sliding path. This decline in global demand is putting pressure on the export-driven Chinese economy.
The world's largest exporter, China's exports account for 13.7 per cent of the global pie. India's overall exports have contracted for seven straight months until June 2015.
Mr Subramanian said China, on the one hand, has devalued the currency and taken measures aimed at reducing the spread between onshore and offshore rates.
"This action is both an endeavour to make their yuan a more plausible credible candidate for inclusion in the SDR basket," he said.
Special Drawing Rights (SDR) is an international reserve asset created by the International Monetary Fund (IMF) to supplement its member countries' official reserves.
Talking about credit growth in the economy, Mr Subramanian said when the wholesale price index is in negative for eight months, one should not look at nominal credit growth.
"... Real credit growth has started increasing after declining for several quarters and within that, there is a sharp divergence between real credit growth to the personal sector, which is doing surprisingly well, while its credit growth to industry that remains relatively weak," he said.
"There is no doubt that China is responding to its own internal development of slowing down of growth and exports in order to give its economy a boost. All of us policymakers around the world, including India, have to take notice of this action," he told reporters here.
Mr Subramanian, however, refused to comment on the impact of yuan devaluation on India and its exports.
China's central bank yesterday devalued its tightly controlled currency by close to 2 per cent to boost exports, amid a slowdown in the world's second-largest economy and the recent stock market crash.
Even global exports are on a sliding path. This decline in global demand is putting pressure on the export-driven Chinese economy.
The world's largest exporter, China's exports account for 13.7 per cent of the global pie. India's overall exports have contracted for seven straight months until June 2015.
Mr Subramanian said China, on the one hand, has devalued the currency and taken measures aimed at reducing the spread between onshore and offshore rates.
"This action is both an endeavour to make their yuan a more plausible credible candidate for inclusion in the SDR basket," he said.
Special Drawing Rights (SDR) is an international reserve asset created by the International Monetary Fund (IMF) to supplement its member countries' official reserves.
Talking about credit growth in the economy, Mr Subramanian said when the wholesale price index is in negative for eight months, one should not look at nominal credit growth.
"... Real credit growth has started increasing after declining for several quarters and within that, there is a sharp divergence between real credit growth to the personal sector, which is doing surprisingly well, while its credit growth to industry that remains relatively weak," he said.
Written By: Varun Sinha, NDTV Profit
11 comments:
Sir, according to me yuan devaluation will impact India and will create many problems.The Chinese devaluation though marginal will create a flutter globally.It will certainly have negative impact on India's exports. Inflation is one of the biggest problem which will be faced which in turn will effect growth.The currency has direct implication on inflation. India cannot afford to have inflation for a long period as it has both POLITICAL and ECONOMIC implication. A sharp fall in rupees will also effect foreign capital. India lacks infrastructure facilities which make doing business in India costlier, with sharp fall in rupee it will have impact on foreign direct investment if china becomes more attractive destination than India than investor will go there where with exchange rate he will get more kick for his dollar.... If India becomes a factory to the world like China a weak currency is definitely the answer. But letting rupee fall to support a few product won't help boost India's exports.
Sir,
The devaluation of yuan by China is an absolute mean step taken by China to boost it's falling exports, China having a good hold in the world economy,this step is likely to affect economies of many countries and India is the one which would be affected to a large extent as it would affect both our domestic market as well as our trade with other countries. The manufacturers producing for the domestic market will suffer because of the imports of Chinese goods as they will be cheaper and the manufacturers exporting will face competition as both the countries deal in moreover the same goods.Because of all this India's stand in the global market will come down and inflation will also take place thus affecting not only the market but somewhat each citizen's budget.
sir,
I totally agree on how the yuan devaluation will impact India. rupee volatility,pressure on exports and swamp of incoming Chinese goods in our market will be obvious results. this will impact both our imports and exports.Us having a trade deficit already will only make the matters worse for the imports.Plus because of the large overlap between India and china in markets and products, will hamper our exports .moreover being cheap the Chinese goods will swamp the Indian markets which will give our domestic producers a hard time to compete .in all the given scenarios India is shown to be in a fix ,so my question is what measures should India take right now to minimize this impact??
Sir,
China's devaluation will definitely have a bad impact on India's economy because most of its economy is dependent on China. As mentioned that if the rupee will fall sharply imports will become costlier which later may lead to inflation. And a matter of fact India imports more that it exports , so it will effect the balance of our economy , along with other countries.
All this will make doing of business more costly and also will effect the FDI .
This problem is an answer to all the rights activists in India who have problems with every step taken by the government.China is clearly taking advantage of the fact that it is a manufacturing powerhouse and world market cannot be imagined without it.The international agencies are forced to turn a blind eye towards what china does.
We also could have been in the same position had people of India wouldn't have allowed politics of appeasement to nurture and empowered the government to take necessary steps.
Where is United States right now?Imposing economic sanctions has become their speciality and now they can't gather the courage to utter a word because it's China and its an international baniya which has lent a lot of money.That is where all the leverage comes from.
This problem is an answer to all the rights activists in India who have problems with every step taken by the government.China is clearly taking advantage of the fact that it is a manufacturing powerhouse and world market cannot be imagined without it.The international agencies are forced to turn a blind eye towards what china does.
We also could have been in the same position had people of India wouldn't have allowed politics of appeasement to nurture and empowered the government to take necessary steps.
Where is United States right now?Imposing economic sanctions has become their speciality and now they can't gather the courage to utter a word because it's China and its an international baniya which has lent a lot of money.That is where all the leverage comes from.
I agree with the afore-mentioned facts.
The devaluation of Yuan seems to be well-thought and implemented idea of the PBC,and is an example of 'Dirty Floating' too.
This poignant move actually has come like a 'Smack' on several economies in the world, specially during the time when some international associations and economies were urging it to reduce its control on its currency.
Although its China's well known past, that it has always tried to artificially control its currency which somehow has been a reason-for it being the second largest economy in the world with a very strong industrial and trading backbone.
However it seems to extremely dismal for some small economies & developing nations like India too, which were expecting great potential and possibilities in near future
According to me, this move shall greatly affect our(India's) industrial growth(INcluding extensive impact on 'Make IN India' initiative too) in the upcoming years ,for the fact that it will be beneficial and cheaperfor investors to set industries/produce there as decrease in value of Yuan will make production cheaper. It must impact our future spending and paying(A tremendous part of which is deficit of the past) to china as well as Chinese products already have wide penetration in our markets as well.
From Global perspective, I feel this move is destined towards further strenghtening of China’s economy and taking a step futher towards being a Global SuperPower, keeping in mind the fact that China had since long been urging the IMF to make Yuan a official currency at par with Dollar,Yen,Pound....
This Move has definitely rattled the markets in the era of liberalisation.
INDIA will surely be effected by the initiative and the effects somewhat can already be seen-Rupee has fallen to 2 year low -65.
We definitely need to machinate a suitable and subtle idea to ensure that our growth potential in industrial sector, our exports and possible investment is not snatched away and precipitated in China in the years to come. Please DO Correct me if my analogy went wrong- somehow ,somewhere
Sir,
I agreed with the above mentioned facts.
With the depreciation of yuan, the export competitiveness of China stands improved from the current levels and as a result of which, things should possibly be creating pressure in other markets of the world.
It will be difficult to quantify, but certainly, at the macro level, pressure is going to be there.
Yuan devaluation is a challenge obviously because it makes our exporters a little uncompetitive … As it is, they have to deal with a higher interest rate. Devaluation means Chinese exports become that much cheaper.
India's overall exports get hampered and it will also throw its impact on domestic market.
Although This move by china is a wise move taking advantage of position it is holding in the world.
Dear Astha, Kanay, Aditya, Unnati, Kaustabh, Anukrati & Saumya,
Well researched and cogent expression of ideas.
What India has to do is find out, 'What is that list of goods and services which No One can Produce?' We need to be competitive and very very innovative to even start thinking about competing with China. The civil society, Universities, thinkers, leaders and scientists will have think in a dedicated manner towards achieving world class products and services.
The worry is, India's negligible trade presence and abysmal performance of the IITs / IIMs / IISC / ICMR / NLUs in registering for patents. Interestingly, when the same scholar from these Institutions goes abroad, his skills are maximized. The other problem is the way our political system and leaders have taken the country to the doldrums. To top it all, we are a country full of holidays and celebrations. As a result, our working calendar is far too shorter than any other country of the world.
The question is, why is this so? Are we great in just celebrating or there will be a time when we really Walk the Talk? Real joy is, when the world calls us 'Great'. The overconfidence is doubled with the oft self-praise..
I have read all the comments with avid interest and I am confident that if you keep this passion ahead, there shall be wonders !
Keep posting & sharing !
Warm regards,
Arun
Respected Sir,
I completely agree to the fact that appreciation and depreciation of foreign currency, and that too of a country like China that influence Indian markets on a large scale, adversely affect India in various fields and mostly in Imports, Exports and share markets. When there is a currency war between countries, one is a loser and the other is a gainer and this is what economics teaches us. Stock markets will shrink, exports will raise, imports will be less and the economy shuts down when there is devaluation of domestic currency.
If we look at today's(17th Aug) report the price of dollar rises by 15 paisa. This minute rise will affect both the countries in many ways, one in a good manner and other in a bad manner.
According to me the exchange rates are determined by the demand and supply of foreign currency in the market and as we have already studied that we should let the markets function on their own so that there is an equilibrium set in the market so that the problem of economic inefficiency does not arise. Also government must encourage foreign investments in our country so that the supply of foreign currency increases in our country and our rupee becomes stronger in the foreign market(taking dollar as a standard foreign currency). Continuous devaluation on Indian currency is a major economic issue and must be dealt with utmost care so that the relations with other countries do not get affected as this would be a greater loss.
Thanks
Prateek Mittal
15BAL106
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