China Devalues Currency by 1.9%, Capitals Shaken

SUDDEN MOVE The Middle Kingdom's move to prop up its slowing economy sets off shock wave in currency

markets; Intervention by RBI halts Rupee's slide

Contd..• China's unexpected devaluation of the yuan saw it plunge by the most

in two decades, setting off a shock wave that caused currency markets in Asia and elsewhere to tumble.The rupee was no exception but traders said the Reserve Bank of India intervened in the market to make sure that the drop was cushioned as much as possible.

• The Chinese central bank cut its daily reference rate by 1.9% on Tuesday amid its sharpest economic slump in about 25 years. In recent weeks, the government there has had to implement emergency measures to prop up shares amid a stock market rout.

• The Reserve Bank, which only provides information about market interventions on a monthly basis, is un likely to stop the depreciation of the rupee as long as it's orderly , experts said, even as exporters clamour for a sharp devaluation.

Contd..• The drop in the yuan will further erode the competitiveness of

Indian exports, which are already suffering.• The People's Bank of China said the change was a one-time

adjustment and added that its fixing will become more aligned with supply and demand, Bloomberg reported. The rupee weakened more than 0.5%, or 34 paise, to close at 64.21 to the dollar after hitting an intra-day low of 64.28, a level not seen since May 7.The central bank's suspected intervention helped the rupee recoup its early losses. The Sensex dropped 0.84% to 27,866.09 points.

• The central bank is estimated to have sold dollars at the 64.20-64.24 level, dealers said, adding that frequent RBI interventions are expected going forward, only to keep the exchange rate stable.

Contd..• “The yuan devaluation has a two-fold impact,“ said Ashish Vaidya, executive

director and head of trading and asset liability management at DBS Bank. “While imports from China will be cheaper, giving more competition to local manufacturers, India's exporters, already grappling with an overvalued rupee in terms of REER (the real effective exchange rate), will attract more competition in global markets... Unless the rupee depre ciates, it will not cushion local manufacturers.“

• REER is calculated on a trade-weighted basis against a basket of 36 currencies and adjusted for inflation.

• Since January, the rupee has weakened 1.32% against the dollar. It has strengthened by 0.60% to 10.15 a yuan from 10.21 earlier. In the same period, the yuan barely lost any value against the dollar, a clear indication that the central bank was selling the US currency, leading to an untenable position.

Contd..

• There are concerns about China's economy amid worrying trends. Factory gate deflation has been ongoing for the last 30 months, while debt levels are sky high and set to rise further.

• To be sure, the depreciation could give Chinese companies an unbeatable advantage.

• “A weak yuan can provide Chinese producers with much bigger firepower to dump more goods into the global market,“ said Anindya Banerjee, currency analyst at Kotak Securities. “The rupee has reacted negatively , in line with the selloff in Asian currencies. Over the near term, we expect the rupee to trade within a range of 63.5070 and 64.5070 levels on the spot market.“

Contd..• Earlier this year, RBI governor Raghuram Rajan had spoken about

the use of currency devaluation as a tool by countries seeking to shore up economies and the rationales they use to “depreciate their exchange rate through sustained direct exchange rate intervention or through unconventional monetary policies.“

• One of these would be: “We are in a deep recession. We need to use any means available to jump start growth. Once we get out of recession, the payoff for other countries from our growth will be considerable,“ he said in a speech in May to the Economic Club of New York.

• But he also pointed out that “any `one-off ' has to be limited in duration.“ Rajan has previously also spoken about the damage that competitive central bank policy can do.

Parveen Kumar Chadha… THINK TANK

(Founder and C.E.O of Saxbee Consultants & Other-Mother

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