The back to back depreciation of Yuan by China s Central Bank for two days in a row, is the portent full-fledged currency war between competing and powerful economies of the world.
Ironically, this war would catch Emerging Economies like India in the middle, the ASSOCHAM commented on the surprise move by China which has spooked the global currency and stock markets.
According to a "Quick Check" Analysis by the ASSOCHAM, sharp currency depreciation, the steepest by over two decades, will have a three-fold impact for India.
For one, there is going to be a lot more volatility around the rate of rupee, as is seen today with the Indian currency touching its lowest since September, 2013 forcing intervention by the Reserve Bank.
Secondly, Indian exports which are already under a huge pressure in major markets of the world, would see further erosion in their competitiveness as the Chinese would become much more aggressive in their desperate moves to shore up their economy.
Thirdly, if the Indian rupee is not able to keep pace with Yuan in losing value, China will further dump goods into the Indian market, making the trade deficit further widen.
"Both the RBI and the Finance Ministry should keep a very close watch and take immediate and swift actions to ensure that Indian economy does not suffer the collateral damage of the currency war among the major economies. Chances are that the US may react in a manner which may further queer the pitch", ASSOCHAM Secretary General Mr. D S Rawat said.
He said in a single shot, China has increased the external risks for India and other EMs.
"Indian central bank along with the government and the industry must also make a move that can not only withstand the pressure from China, the US Fed but take advantage of the fast changing situation", the chamber said.