INDIA’S CENTRAL BANK POISED TO ALLOW RUPEE DEPRECIATION IN RESPONSE TO WEAKENING CHINESE YUAN

Economics


    No Tags Found!
 13-Nov-2024

Why in the News?

India’s central bank, the Reserve Bank of India (RBI), is prepared to allow a gradual weakening of the rupee in response to the Chinese yuan’s depreciation. Concerns have arisen over potential new tariffs on Chinese goods following Donald Trump’s recent U.S. election win, leading to expectations of a softer yuan and an increased trade imbalance for India. Policymakers are thus ready to ease the rupee's value to keep Indian exports competitive against Chinese goods.

More on The News

  • Trump’s return to power has heightened fears of substantial U.S. tariffs on Chinese goods.
    • Leading to a weakening of Yuan and potentially a surge in cheaper Chinese imports into India.
    • It could further widen India’s trade deficit with China ($83 billion in 2023).
  • Historical Context: During Trump’s previous term, the yuan fell by 11.5% in 2018-19 amid tariff hikes, while the rupee depreciated 11.2% over the same period, partially offsetting the impact of tariffs.
  • RBI’s Strategy
    • The RBI is likely to allow a controlled depreciation of the rupee while utilizing its substantial foreign reserves (over $680 billion) to prevent sharp declines, aiming for a balanced yet competitive currency.
  • According to Emkay Global Financial Services, the RBI has subtly pegged the rupee against the yuan.
    • Aiming to manage the exchange rate amid a substantial trade deficit with China and is unlikely to let the rupee float freely in such a volatile context.
    • India aims to strengthen its manufacturing sector by attracting companies seeking alternatives to China in global supply chains
    • A competitive rupee is crucial to this strategy, particularly as India is starting to capture a share of the export market in electronics and other sectors.

Difference Between Devaluation and Depreciation

  • Devaluation:
    • It is a deliberate action by a country’s government or central bank to lower the value of its currency relative to other currencies.
    • Primarily it occurs in fixed or pegged exchange rate systems, where the currency value is set by the government.
    • It is used to make exports cheaper and imports more expensive, thereby improving trade balance and potentially boosting economic growth.
    • Example: A country may devalue its currency to make its goods more competitive in international markets.
  • Depreciation:
    • It is a natural decline in a currency’s value due to market forces such as supply and demand, interest rate differentials, or economic indicators.
    • It occurs in floating or flexible exchange rate systems where the currency value is determined by the market.
    • It can be influenced by external factors like geopolitical events, trade imbalances, or monetary policy but is not a result of direct government intervention.
    • Example: If the demand for a currency decreases due to economic conditions, it depreciates against other currencies.