The rupee fell to a near two-year low of 64.94 against the dollar on Wednesday with China devaluing its currency yet again by almost 2% in a bid to boost exports and pump up its economy . The rupee closed at 64.81, a drop of 60 paise from its previous close of 64.21.
The sensex fell 354 points to 27,512 over concerns that a weaker yuan would dent the rupee and worries that the parliament logjam would stall reforms. Gold prices, however, surged towards the level of 26,000 per 10 gram after fears over the weakness in the Chinese economy--the second largest after the US.The yellow metal has rallied by almost `1,000 in the last five days.
While any fall in the rupee triggers inflation due to increase in the cost of imported goods, bankers say that the situation is far better than the one in 2013 when the rupee nudged 70-levels following an announcement by the US Federal Reserve that it would start tightening monetary policy. Unlike 2013, prices of commodities, particularly crude oil, have come down sharply now. Also, India's external position is much better than it was two years ago.
The rupee's depreciation is expected to benefit software exporters. The S&P BSE IT Index was up 2.6% on Wednesday with Infosys, HCL Tech and Tech Mahindra being among the top gainers. Exporters, particularly those exporting to China or competing with Chinese exporters, are expected to be badly hit.
While the rupee has weakened in the last three days it has been among best performing emerging market against the US dollar. “ A steep depreciation of the yuan will deal a further blow to Indian exports, which are battling a slowdown in most markets of the world, as the shipments from the country will further lose competitiveness against the Chinese goods,“ said Engineering Exports Promotion Council chairman Anupam Shah . There are some who feel that the RBI will let the domestic currency gradually drift downward even if it steps in to stem volatility. “With yesterday's unexpected move (on yuan depreciation), the RBI is likely to actively maintain a floor under the USDINR to counterbalance steady gains on real terms“ said DBS . It added that the rupee could touch 65.60 by the end of the year. China's second round of devaluation took the market by surprise.“We do not rule out smaller actions in the coming weeks. However, we do not believe that China will engineer a big devaluation, or a few consecutive devaluations, in an attempt to boost exports. It would take a much bigger change to ease the pressure on exporters, but that is not on the decision makers' high priority list, in our view.We believe a key concern for the PBoC is that an outsized exchange rate devaluation could trigger capital flight,“ said Credit Suisse in a report on Tuesday .
