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 titled 'Implications of Devaluation of Chinese Yuan' said.
"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”, it said.
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 export#
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.
According to the paper, the Yuan which has been devalued thirce 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 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 report 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," Assocham President Sunil Kanoria said.
The Yuan's 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 exports, 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 $48.5 billion increased by over a third from $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 $18 billion, but in 2014-15, the value of exports dropped to below $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 paper said.