People's Bank of China (PBoC) on Monday cut the Chinese currency Yuan's reference rate by 1.9 per cent devaluing the currency and bringing back memories of competitive devaluation to boost exports. Yuan was trading at 6.32 against the dollar on Tuesday morning.
The country's central bank took the decision to devalue Yuan after a string of disappointing economic data, especially exports which fell 8.3 per cent in July.
China, which braved the crisis of 2008 along with other emerging economies, has been facing a multitude of problems over the last couple of years. The country, which decided to shift base from an export oriented economy to a domestic consumption based economy, has been struggling ever since from high debt and languishing exports. A trembling stock market and the fall in China's housing market have also added to country's woes.
The country, which was once the fastest growing economy in the world, has lost its top spot as weak global demand and an overvalued currency has led to worsening exports.
The India impact
While the devaluation is aimed at boosting China's exports, it is expected to have a direct impact on economies competing with China on that front. While the US and the UK have started recovering, turmoil in eurozone and weak global demand have shaken the Asian model of export-oriented growth.
While India is already struggling on the domestic front with legacy issues like infrastructure and stalling of key legislation, a loss in currency competitiveness against Yuan will further hurt India's ailing exports.
Though India cannot do much about the currency, rupee is expected to remain strong as oil prices tumble and markets remain flush with foreign money. While the impact of China is negative for exports, it may provide a good opportunity for Indian debt and equity markets.
The Chinese devaluation has scared foreign investors who may flock to India to look for better returns. A depreciated currency shrinks the dollar value of investments at the time of repatriation.
Given that other large emerging markets—Brazil, Russia and South Africa—are going through their own problems, India is the best placed among the top developing nations to attract some of the capital.
But with the US expected to raise interest rates this year, the effect might be short lived as investors would look to flock to a safe haven to park their financial assets.
A bigger concern that arises from the Chinese devaluation is for the Reserve Bank. RBI governor Raghuram Rajan, who has been warning against the "beggar thy neighbour" policies, may have to alter rate decisions in order to keep up with the global environment.