Two days ago US President called Chinese (and Europeans) engineering a currency devaluation. Yuan (CNY) has actually dropped by over 5% over its Dollar value in mid Jun.
China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field…
— Donald J. Trump (@realDonaldTrump) July 20, 2018
In “So far China has responded to the trade war by easing monetary policy and letting the yuan depreciate,” JPMorgan economists Jahangir Aziz and Zhu Haibin were quoted by Bloomberg. However the devaluation is having unintended consequences across the whole wide world. On friday INR too touched its all time low. The rupee extended Thursday’s losses as it hit a record low of 69.13 per dollar in early trade on Friday. While there was a recovery the signs are on the wall. Weakness in CNY are spreading a contagion with which India will not be immune.
While the Indian parliament debated the logic of a ‘no-confidence motion’ with hugs, winks and jumla logic, no one cared to take measure for the ripples of a trade war that is already hitting home.
China’s shock devaluation of the yuan in 2015 provides a good template for what the contagion might look like, according to Robin Brooks, the chief economist at the Institute of International Finance and the former head currency strategist at Goldman Sachs Group Inc. Risk assets and oil prices would likely tumble as worries about growth arise, hitting currencies of commodity-exporting countries particularly hard —namely, the Russian ruble, Colombian peso and Malaysian ringgit — before taking down the rest of Asia.
RBI on its part will be ready to fight the contagion through intervention. With a reserve of 25.9 Billion USD the Indian Central Bankers will give enough time for policy makers to wake up to a new reality where, in USD terms, imports bill will be outpacing exports by a long margin. Indian current account deficit will start reflecting the that of May Jun 12. At which point even the Oil will fall arresting the fall of Indian economy as a whole.
The fall in Oil prices though, is a speculation. If it were to be even delayed Indians will be looking at a crisis never before. Since there is no apparent movement in trying to secure a stable rate with any of the OPEC countries it seems India is shrugging off a great fiscal danger staring them at face. With Iran being sidelines by US, and Rupee Rial mechanism already at place it would be irresponsible for the Modi government not have agreements with Iran which can cushion any such oil shock.