What yuan devaluation means for us

China's recent currency devaluation has, amongst other things, strongly reinforced the recognition that China is, indeed, the number two force in the world today. People used to say that when the US sneezes, the world catches a cold. Today, it may be more appropriate to say that when the US sneezes, the world gets the flu and when China sneezes the world gets a cold.

While the immediately apparent reason for the devaluation was a sharp (8.3 per cent) fall in Chinese exports in July, the Peoples' Bank of China has said that the "devaluation" was really a planned move towards making the yuan more market-determined so that it could shortly qualify for inclusion in the International Monetary Fund's (IMF) special drawing rights (SDRs). While this could well be true, the market is a bit skeptical since the Chinese economy has been weakening sharply in recent times and a weaker yuan could purely serve the purpose of building growth through bolstering exports.

In any event, the impact of the devaluation has been quite significant. First, equity markets worldwide dived in a knee-jerk reaction, although they have recovered their composure somewhat. Currencies and commodities, though, comprise another story.

Till this move, the yuan had fallen against the dollar by just 2.6 per cent since January 2014; in comparison a basket of 19 other currencies had declined by nearly 20 per cent on an average. Unsurprisingly, China's exports had been stumbling. Currency rates are important for export growth but, as the Reserve Bank of India (RBI) governor Raghuram Rajan mentioned in answer to a question at the last monetary policy, are not the only determinants. Nonetheless, the countries in this group whose currencies declined by over 20 per cent saw reasonable (up to 10 per cent, in some cases) gains in exports, whereas currencies that fell by less saw, in some cases, severe declines in exports.

India, unfortunately, is in this second group; in fact, India's performance, with exports declining for eight months in a row, was one of the worst in the group. While the rupee has fallen by about 1.5 per cent against the dollar since the Chinese devaluation, it is still just five-six per cent down as compared to January 2014. No wonder the Ye Olde Federation of Indian Export Organisations (FIEO) is shouting from the rooftops that exports need sustained support.

Indeed, many are expecting the RBI to cut interest rates shortly, not waiting for its next monetary policy meeting. This could reduce investment inflows that are keeping the rupee from finding a lower level. On the other hand, the RBI appears to be dead serious about preventing a major decline in the rupee, perhaps because it fears the impact on corporate balance sheets that have large unhedged forex borrowings or, equally, the impact on inflation. It could also be that the RBI is concerned that with the global situation increasingly nervous - particularly if the US hikes interest rates in September on top of the yuan devaluation - it may lose control and, if the rupee goes into a phase even remotely resembling the free fall of August 2013, it may have to jack up interest rates putting the hard won macro stability of the past 18 months at risk.

Being a central banker means never sleeping enough.

At some level, I can sympathise with this sentiment since I believe that the global economy is still very, very tentative in terms of growth. Indeed, commodity prices, some of which are plumbing 2009 depths, are also signalling that generating growth is going to be hard going in most countries. And while there are signs that the sell-off in (some) commodities may have reached a limit and we could see some rebound, the medium term prognosis for many commodities - particularly oil - is of a prolonged slump. China has been the biggest buyer of many commodities for several years now and it is certainly clear that demand from there is going to be subdued for some more time.

All this is good news for India - a big buyer of commodities - since the government could substantially reduce subsidies improving its finances quite a bit. In fact, India is quite well-positioned to benefit from the current - and, possibly, ongoing - global uncertainty. The long overdue restructuring of PSU bank management is a welcome move; Goods and Services (GST) would be another.

There's much more to be done, of course, and the government needs to focus on the economy rather than politics so we can take best advantage of this opportunity. more  

View all 21 comments Below 21 comments
This blog is like chinese whispers game; we started with Yuan devaluation and ended up with reservation etc??????????? more  
Reservation was inflicted on this country by some non-visionary leaders after independence , since then it has become a useful tool to gain power by corrupt/divisive/crooked politicians. It has further divided our country and society, and continues to do so. All reservations or for that matter any policy based on birth should be unconstitutional. HOW WE CAN SAY THAT THERE IS EQUALITY OR JUSTICE FOR ALL IN THIS COUNTRY WHEN THERE IS IN-BUILT DISCRIMINATION BASED ON BIRTH IN OUR CONSTITUTION. SLAVERY WAS WORST THAN ANY CASTE DISCRIMINATION, YET USA/WEST NEVER WENT FOR SOME SHORT SIGHTED DIVISIVE POLICY LIKE RESERVATION. All poor citizens irrespective of birth should be helped to acquire education to any level based on their talent/merit, that is a just policy. more  
Well, in my opinion...enough of RESERVATION...abolish all reservations with compulsory Basic Education for all and revert to MERIT in all walks of life...if we really want to see some honest progress & quality in India, otherwise, let's keep progressing...:) more  
Unless the MLA's, MPs, minister's, sons,daughters,daughter in-laws,brothers,siblings,and affluent sca,sts,bcs,mbcs,giveup their rights to reservation quotaas in all walks of life voluntarily for eng,medical,school,college education and govt job quota systems our country cannot improve and really talented economically weaker is the ultimate suffererss.....this voluntarily giving up by the above mentioned persons will divert funds to massive infrastructure building of the nation...why nobody is thinking on these lines? It's more than 69 years now!?...scrap general reservation systems and re engeeneer the entire reservation quota system policies and the finance minister to think on these lines also.,so that only the fittest will be financially benefitted like marginal farmers,agro based workers,agriculturists,non village migraters,etc etc. more  
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