Hopefully the scare over a possible precipitous fall in the rupee with the Cassandras among the analysts predicting the worst, will remain just a scare. A research report by the DBS Group says “despite the latest adjustment (in the yuan), the rupee is still amongst the best performers in the region on quarter-to-quarter basis. India is amongst the least dependent on China as an export destination in the region.”
This is not to say that India should not be concerned about a cheaper yuan or the renminbi as it is also called, hurting its competitiveness. But even slightly weakened yuan is only part of the reason why India’s huge trade deficit with China at $48 billion last year, will widen. The significant reason is the huge appetite of Indian manufacturers for Chinese goods particularly electronic goods, machinery and metallurgic, chemicals etc., because of the cheap landed costs and easy availability. A depreciated yuan could mean even cheaper Chinese goods, but the relieving factor is that Chinese manufacturers are now constrained by higher labour costs.
The rupee initially went above the comfort level at over Rs 65 to the dollar when the People’s Bank of China depreciated the value of the yuan by 1.9 per cent but on Friday it ranged between Rs 64.97 and Rs 65 to the dollar. Some say the rupee could go to even 66 to the dollar depending of course on how far the yuan is allowed to depreciate but for now the general view is that it may not go beyond 65.25/30 to the dollar.
The RBI will have to keep a hawk eye as China is under pressure both from the US Fed and the International Monetary Fund to allow its currency to go with the market forces. China has been pumping up the yuan over the years by buying dollars and its reserves runs into trillions of dollars. But now that its sights have been set on internationalising the yuan and getting it included in the IMF’s special drawing rights (SDR) basket, it will have a controlled depreciation of the yuan.
India Ratings chief economist Devendra Kumar Pant believes that the devaluation of the Chinese yuan will help increase the competitiveness of Chinese exports. However, a further decline in the currency may make it difficult for India to maintain its pace of monthly exports at $22 billion.
India can cushion some of this if Prime Minister Narendra Modi can persuade China to cut its import tariffs on Indian goods like handicrafts and other labour intensive items. The Chinese are equally interested in trading with India and are aware of the huge deficit that needs to be reduced. The rupee has been bolstered by the steep fall in oil prices and commodities including gold and lower gold imports.
Foreign direct investment (FDI) is also picking up and if only the Modi government can gets its act together and take administrative measures to facilitate the ease of doing business FDI will continue to flow in. He has set the path by scrapping antiquated laws and cutting down procedures and processes but it is not being done at the pace required. The Make-in-India idea has yet to take off. This is one programme that can bring in the much needed FDI but the government is not taking the various measures required to make this a reality. If all this is done there is no reason for the rupee to become a victim of a depreciating yuan.
