12/29/2015 What devaluation of yuan means for India

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JAMAL MECKLAI @jamalmecklai

MONEY | 4-minute read | 20-08-2015

China's recent currency devaluation has, amongst other things, stronglyreinforced the recognition that China is, indeed, the number two force in theworld today. People used to say that when the US sneezes, the world catchesa 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 (8.3per cent) fall in Chinese exports in July, the Peoples' Bank of China has saidthat the "devaluation" was really a planned move towards making the yuanmore marketdetermined so that it could shortly qualify for inclusion in theInternational Monetary Fund's (IMF) special drawing rights (SDRs). Whilethis could well be true, the market is a bit skeptical since the Chineseeconomy has been weakening sharply in recent times and a weaker yuancould purely serve the purpose of building growth through bolstering

What devaluation of yuan means for IndiaRBI may be concerned that if rupee goes into a phase remotely resembling thefree fall of August 2013, it may have to jack up interest rates.

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exports.

In any event, the impact of the devaluation has been quite significant. First,equity markets worldwide dived in a kneejerk reaction, although they haverecovered 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 centsince January 2014; in comparison a basket of 19 other currencies haddeclined by nearly 20 per cent on an average. Unsurprisingly, China'sexports had been stumbling. Currency rates are important for export growthbut, as the Reserve Bank of India (RBI) governor Raghuram Rajanmentioned in answer to a question at the last monetary policy, are not theonly determinants. Nonetheless, the countries in this group whosecurrencies declined by over 20 per cent saw reasonable (up to 10 per cent, insome cases) gains in exports, whereas currencies that fell by less saw, insome 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 thegroup. While the rupee has fallen by about 1.5 per cent against the dollarsince the Chinese devaluation, it is still just fivesix per cent down ascompared to January 2014. No wonder the Ye Olde Federation of IndianExport Organisations (FIEO) is shouting from the rooftops that exports needsustained support.

Indeed, many are expecting the RBI to cut interest rates shortly, not waitingfor its next monetary policy meeting. This could reduce investment inflowsthat are keeping the rupee from finding a lower level. On the other hand, theRBI appears to be dead serious about preventing a major decline in therupee, perhaps because it fears the impact on corporate balance sheets thathave large unhedged forex borrowings or, equally, the impact on inflation. Itcould also be that the RBI is concerned that with the global situation

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increasingly nervous particularly if the US hikes interest rates in Septemberon top of the yuan devaluation it may lose control and, if the rupee goesinto a phase even remotely resembling the free fall of August 2013, it mayhave to jack up interest rates putting the hard won macro stability of the past18 months at risk.

Being a central banker means never sleeping enough.

At some level, I can sympathise with this sentiment since I believe that theglobal economy is still very, very tentative in terms of growth. Indeed,commodity prices, some of which are plumbing 2009 depths, are alsosignalling that generating growth is going to be hard going in most countries.And while there are signs that the selloff in (some) commodities may havereached a limit and we could see some rebound, the medium term prognosisfor many commodities particularly oil is of a prolonged slump. China hasbeen the biggest buyer of many commodities for several years now and it iscertainly clear that demand from there is going to be subdued for some moretime.

All this is good news for India a big buyer of commodities since thegovernment could substantially reduce subsidies improving its financesquite a bit. In fact, India is quite wellpositioned to benefit from the current and, possibly, ongoing global uncertainty. The long overdue restructuringof 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 focuson the economy rather than politics so we can take best advantage of thisopportunity.

#Jamal mecklai, #Rupee, #China, #Yuan devaluation,

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12/29/2015 What devaluation of yuan means for India

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WriterJAMAL MECKLAI @jamalmecklai

The author is CEO at Mecklai Financial.

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