Can rupee bear Yuan devaluation?
Chinese currency is weakening and if it is devalued next year, the Indian rupee could be reduced to a rate of 68-70 to the USD, according to a bank report.
“If China devalues its currency meaningfully next year (which is not our base case scenario), then there is a risk for rupee to depreciate to 68-70 against the USD, in our view”, said Deutsche Bank in its research report Asia Economic Month.
This is one risk to rupee as it is true to other Emerging Market currencies, it added.
However such a range shift if rupee would happen only with the explicit support of the Reserve Bank of India (RBI), which in order to restore exchange rate competitiveness will likely not stand in the way of a sharper depreciation of the rupee.
Otherise, Deutsche Bank sees rupee in the range of 66-68 to the USD for the next 12-18 months, with the RBI likely to manage the exchange rate proactively to stem excessive volatility from time to time.
Indeed, the RBI has enough Foreign Exchange (FX) in its coffer to intervene decisively in the FX marekt, if the need arises. It estimates the reserves to be USD353 billion or about 9-10 months’ of import cover.
The German bank also that FX markets will remain volatile next year, influence of US interest rate normalization policy, geopolitical uncertainty and risks of further Yuan devaluation.
EM outflows could gather speed once the Fed starts hiking rates and “though India’s macro position remains in a far better than other fragile EM countries, nevertheless some pressure on Foreign Institutional Investors flows front will be unavoidable, in our view,” the bank said.
Portfolio flows into India have already have already fallen sharply in the first eight months of the current fiscal year compared to last year, led mostly by global factors.
“While pressure on rupee will emerge from time to time, we think such volatility will be temporary an will be managed adeptly by the RBI,”it said in the December 2015 report “Asia’s triple troubles”.
Also the fact that India’s Foreign Direct Investment outlook remains positive, is reassuring as it will reduce any potential risk to disorderly financing of the current account deficit, said Deutsche Bank. fii-news.com
