Mumbai, Aug 13 (IANS) Continued devaluation of the Chinese yuan sank the Indian rupee further on Thursday to its lowest level against the US dollar in 24 months at Rs.65.23 to the greenback.
The partially convertible Indian rupee touched a low of Rs.65.23 to a dollar in the intra-day trade at the Interbank Foreign Exchange Markets here. It finally closed at Rs.65.10 on Thursday — having closed at Rs.64.85 to a dollar on Wednesday.
Analysts said the devaluation of yuan, intended to boost Chinese exports, has made investment in China cheaper. This is leading foreign investments away from India.
China’s central bank devalued yuan by two percent on Tuesday. This was the biggest devaluation in the Chinese currency since 1994.
The currency fell again by another two percent on Wednesday panicking the world economy.
The measure to devaluate the yuan to arrest the implosion in the Chinese markets is seen as an attempt to corner international exports from other emerging trading powers such as India and the Asean (Association of Southeast Asian Nations) grouping.
The move has also strengthened the dollar value, which has negatively impacted major world currencies including the Indian rupee.
“The Indian rupee is reacting to the Chinese yuan’s devaluation. The yuan has fallen by 4.6 percent till now. On the other hand, the Indian rupee has ben very stable for the last six months due to the efforts of the Reserve Bank of India (RBI),” Anindya Banerjee, senior manager for currency derivatives with Kotak Securities, told IANS.
“Given the sufficient forex reserves with the RBI and the new reality of the Chinese devaluing their currency, the threshold of the rupee should now be in the range of Rs.64-66.”
The Reserve Bank has been pretty active in the forward purchase markets since the last 22 months. It sells dollars whenever the rupee crosses the Rs.64 mark and buys when it falls below Rs.63 to a dollar.
Though at a very short movement, RBI was seen comfortable with the rupee ranging anywhere between Rs.63.20-Rs.64.30 per dollar.
The RBI’s strong control over the rupee has given the currency strength and resilience to withstand international financial crisis like the recent Greece debt issue.
According to Banerjee, the markets are panicking because the $10 trillion dollar-worth Asian economic giant has the ability to dump unlimited amounts of goods and services, thereby cornering the entire international market.
“After their stock market collapse, the Chinese economy is imploding and the powers that be there are trying to arrest the fall. The Chinese central bank is not defending the yuan,” Banerjee elaborated.
Going forward, the US fed’s decision on interest rates and stimulus easing have to be seen to assess the impact it would have on the emerging markets, especially India.
Other market observers point out that the depreciation in the rupee value has helped the information technology (IT) and other exports-related stocks to gain on the equity markets.
“The currency wars have started at a time when the world economy is stalling, commodities prices are falling and the Chinese markets are bleeding,” Alex Mathews, head of research with Geojit BNP Paribas, told IANS.
“The Indian rupee has fallen to Rs.65.05 to a dollar. However, the move has helped the IT and other exports-related stocks.”
The S&P BSE IT index gained 445.53 points and technology, entertainment and media (TECK) index rose by 164.61 points, since the devaluation of yuan depreciated the Indian rupee.
However, Devendra Nevgi, chief executive of ZyFin Advisors, told IANS that the impact of the yuan devaluation on India will be short-lived, as the country has limited trade ties with China.
“The limited trade ties with China and the fact that high-end exports like IT from India will get benefited more will negate the impact of yuan devaluation,” Negi elaborated.
He quipped that though the currency valuation is important, other factors like technology and kind of goods being shipped out are more important aspects to increase the trade.
Current data showed that even with limited trade ties with China, India’s trade deficit with the Asian giant touched $8 billion during April-May of this fiscal.
India ships out nearly five percent of its total exports to the east Asian economic giant, while 15 percent of the total imports come from China.