The devaluation of yuan has put a special focus on the potential of the move eroding India’s trade competitiveness. Experts differ on the impact with some saying that the competitiveness factor were beyond currency movements, while others saying that India can maintain its competitiveness if rupee also declines.
India has had a sustained trade deficit with China, which touched nearly $50 billion in fiscal 2015. The risk for India comes from two ways: one cheaper imports from China affecting domestic companies and second it would affect India’s exports to other countries.
“Our worry is that if there is one more poor economic data, China is again going to devalue the currency, which would have an cascading effect on other currencies and which would affect our export potential to other countries where we have to compete with China,” Ajay Sahai, Director General of Federation of Indian Export Organisations said.
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Indian rupee which has been a best performing currency, hit a two-year low on Thursday.
“To retain export competitiveness to the extent possible, the rupee must also decline. It may be pointed out here that since 2013 onwards when the RBI took corrective measures to steady the rupee, our currency has performed better than those of other emerging markets. There are definitely signs of competitive depreciation across countries – driven currently by market forces and not governments or central banks,” said CARE Ratings in a note.
The markets are going to keep guessing the RBI’s intervention and action and hence the rupee will be volatile. A lot depends on when the depreciation of the renminbi stops and at what level it stabilizes, it added.
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Brokerages Nomura and DBS Group Research point out that the trade balance between India and China are beyond just currency movements. Both of them pointed that there has been increased imports from China despite a significant appreciation of the yuan versus the rupee. They pointed out that India should focus on policy related efforts in boosting competitiveness.
Jagannath Panda, Research Fellow and Centre Coordinator for East Asia at the Institute for Defence Studies and Analyses reckon that India should take up the currency debate with China in the India-China Strategic Economic Dialogue.
“Currency movements have never been part of these dialogues so far, might be a good time to include them.”