General Awareness

April 04, 2017 @ 01:15 PM

Devalued Yuan & It’s Impact on India

Published : Tuesday, 12 January, 2016 08:00 AM

Devalued Yuan & It’s Impact on India

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Read General Awareness Topic: Devalued Yuan & It’s Impact on India

Following the continuous decline of manufacturing growth in China for the past nine months, People's Bank of China (PBoC) the central bank of China) devalued the Yuan by 0.34% on January 5, 0.2% on January 6 and 0.5% on January 7 giving the first shock of the year to the global capital markets. Increasing labour cost in China has shrunk the profit margin of manufacturing companies affecting the growth of manufacturing.

Now China wants to reverse or at least arrest the declining growth and export by manipulating its currency. China is a trade based economy with over 15% and 11% share in the world exports and imports respectively in 2014.

Since China is India’s largest trading partner, devaluation would definitely affect India and the Union Commerce Minister Nirmala Sitharaman herself had called it a worrying sign for India. In the year 2014-15, the bilateral trade between India and China stood at USD 72.3 billion with the trade gap of USD49 billion in favour of China.

The devaluation of Chinese Yuan may impact the Indian economy in following ways

External Trade

Currency devaluation is often used as a tool by different countries to bridge the balance of payment (BoP) gap as devaluation increased the cost of import and makes exports relatively cheaper. Since devaluation would make the Chinese imports or Indian exports to China expensive and Chinese exports i.e. Indian imports from China cheaper, the deficit of USD49 billion between India-China bilateral trade would get further widened. Also in the international market where Indian and Chinese exports compete, devaluation would give an edge to Chinese exports as they would become relatively cheaper for vis-à-vis Indian exports. Affected sectors include textiles, apparels, chemicals and project exports where Indian and Chinese exports compete in international market. In order to reduce the impact of devaluation, many analysts believe that Reserve Bank of India (RBI) might not intervene much and let the rupee depreciate to keep it competitive.

Capital Market

Devaluation of Yuan triggered a sell-off in the global stock markets and India was not an exception. On January 7, 2016, Sensex of Bombay Stock Exchange (BSE) fell by 555 points to a four month low and the Nifty of National Stock Exchange (NSE) fell by 173 points. Similar trend was witnessed across the global markets where the pan-European Euro first 300 index went down by 2.3% and Euro STOXX index fell by 2.5%. Movement of Sensex usually indicates the prevailing business climate in the economy. However, if the Sensex is falling due to distress selling as happened recently, it indicates gloomy future.

Industry

Textile is the biggest industry in which India competes with China. Devaluation may further stiffen the competition for Indian textile manufacturers and shrink their profit margins. Chemicals is another industry produced by both India and China. Low crude oil prices along with devaluation in China would only increase the challenges for chemical industry. Also, shares of Indian automaker Tata Motors fell over 6% on concerns that weak economic growth in China could impact the sales of its Jaguar Land Rover in China. However, most of the electrical consumable goods are imported from China and such goods will become cheaper if the importing companies passed on the benefits to the consumers instead of pocketing it. Apart from this, e-commerce industry will also benefit from the move as most of these companies sell the goods largely imported from China and devaluation would reduce their import cost. 

The devaluation of Yuan can also trigger the depreciation of Rupee and as already stated, most likely RBI would not interfere so as to make the Indian exports competitive. However, depreciation of currency also fuels the inflation. The impact of Chinese devaluation and other such external shocks can only be neutralized by introducing strong economic fundamentals which in turn can be realised by introducing further economic reforms.

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