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China’s Yuan devaluation may hit Indian exports

Date 12-Aug-2015
Subject China’s Yuan devaluation may hit Indian exports

NEW DELHI : China's unexpected decision to devalue the yuan in a bid to boost sluggish overseas sales has come at a particularly bad time for India, experts said.

It's also raised the possibility of a currency war as countries battle for a share of the slow-growing global export market. India's exports have contracted for the past eight months amid an erosion of competitiveness, impacting domestic recovery and also potentially threatening the Narendra Modi government's Make in India programme. This aims to turn India into an export-led manufacturing centre to create jobs, lift incomes and hasten growth. 

On Tuesday, China's central bank cut the yuan's daily-fixing rate by a record 1.9%, leaving Indian exporters a worried lot.

"This is not good news for Indian exports. This will further dent the competitiveness of Indian exports," said Ajay Sahai, director general and CEO of the Federation of Indian Export Organisations lobby group, echoing frustrations over the "oneoff depreciation" by the Chinese central bank that has taken the yuan to a three-year low. 

"It will not just hurt Indian exports to China but largely to third countries. India already has a trade deficit of close to $50 billion with China," Sahai said. Finance secretary Rajiv Mehrishi said the move seems to suggest that China is moving toward a flexible exchange rate. 

"In my opinion, it should have some impact on our exports. Exports from China would be cheaper," he said, adding that it was difficult to quantify the impact. 

Companies see the move squeezing margins. "It could increase margin pressure on India's exports where we compete with China," said Anil Bhardwaj, secretary general, Federation of Indian Small and Medium Enterprises. The Chinese central bank devalued the yaun after data showed growing trouble for the world's second biggest economy that has been hit hard by the near 15% trade-weighted appreciation over the past one year. 

China's exports fell 8.3% in July suggesting further weakness in the economy that's likely to grow at a 25-year low of below 7% this year. Attempts to revive the Chinese economy through devaluation spells trouble for everybody else. India is battling a loss of competitiveness because of the relative appreciation of its currency against those of its competitors. 

"Today's move also has significant implications for the rest of the region. To a large extent, the CNY (yuan) operates as a regional anchor, limiting the ability of the other regional currencies to fall against the US dollar," said Richard Illey, chief economist, emerging markets, BNP ParibasBSE -2.78 %. Sonal Varma, executive director and India economist at Nomura, said the impact will depend on future action. 

"If it's a one-off move then besides some short-term impact it would not have much effect. One day's move would not change the dynamics," she said. "If it's the start of a trend then at the margin it would start eroding India's competitiveness." HDFC Bank's chief economist Abheek Barua expects some sort of currency sparring. "We would need to ensure that we don't overreact but keep on intervening and not be seen out of whack with Asian peers," he said, but added that the move may not be overtly negative for the current account. 

"We supply a lot of raw material to China... If its domestic situation gains, then it could benefit us," he said. Aggressive intervention is an option but panic reaction should be avoided, he said. Some sectors may be especially vulnerable. The devaluation will benefit steel exporters, for instance, but if they choose to retain the additional margin, this would not have any significant incremental impact on international prices, said Jayanta Roy, senior vice president, ICRA. "However, if they drop their export price in order to push volumes, this would lead to a further softening of international steel prices, impacting the competitiveness of Indian steel manufacturers," he said. 

Source : economictimes.indiatimes.com

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