Any depreciation in rupee on account of China-led turmoil in the global financial markets should only be welcome sign for India, or else Indian exports will suffer more at the hands of China and other emerging countries witnessing correction in their currencies, an ASSOCHAM Paper has pointed out.
"India should allow its currency to slide while the RBI should use ample foreign exchange reserves to defend the currency only if there is a rout situation. However, there is a distinct possibility that rupee could actually strengthen over the medium term", the paper said.
It said India must also ensure that Indian exports need to get back their competitiveness even in the midst of global slowdown. The major challenge is coming from China in various forms with sizeable influence on the currency valuation.
Yuan devaluation, third in the last five months, will negatively impact Indian firms which have export exposure to China in sectors such as tyres, pharmaceuticals, steel and organic chemicals textiles due to a volatile change in terms of trade, the paper said.
"The impact of this devaluation will depend on the time horizon....However, the short-term impact can be negative in some sectors which also include capital goods among others," the ASSOCHAM paper on 'Implications of Devaluation of Chinese Yuan' noted . The devaluation will make Indian exports expensive to the neighbouring country, affecting the competitiveness.
"The biggest concern is the steadily deteriorating balance on the merchandise trade account with China," the chamber President Mr Sunil Kanoria said.
In a damage control for its markets and to keep its exports competitive, the Chinese central bank has devalued the Yuan for the third time in the last five months, sending global investors into a tizzy.
The latest round of devaluation can make India's trade imbalance with China even worse. In any case, the deterioration has been rather steady and secular in the last few years with exports to China dropping. With a sharp reduction in prices of primary commodities which India ships out, the export value is bound to decline in a disproportionate manner to imports since the inward shipments comprise capital, telecom and manufactured goods.
In 2014-15, the trade imbalance at USD 48.5 increased by over a third from USD 36.2 billion (in the previous year). "This large trade deficit is essentially a reflection of India's inability to penetrate the Chinese markets, a problem that seems to have aggravated over the past three years".
In 2011-12, India's exports to China were valued at USD 18 billion, but in 2014-15, the value of exports dropped to below USD 12 billion.
"Going forward, the situation does not look good; rather it has deteriorated with the Chinese demand for primary goods declining and crash in prices", the ASSOCHAM said.
He said while it is true that India is not as badly affected by the global headwinds, "we cannot remain insulated and the wisdom lies in cushioning ourselves with generating more traction in the domestic economy while seeking to make Indian exports competitive ".
Even in a third country market, the currency devaluation in China can make things difficult for Indian goods since the rupee depreciation has not been sharp enough to give competitive edge to the country's exporters.
"The fact that China and India compete for several export items such as textiles, leather goods, light engineering , gems and jewellery etc is an additional challenge faced by the Indian exporters. Besides, there is also a concern that a weaker Yuan will help China dump goods into the Indian market".