Currency war and competitive devaluation: Same pie, many contenders

As the US trade rhetoric swiftly develops into a trade war, devaluation of local currencies becomes a tool to make exports attractive. However, matters complicate when every competing country vies for the same share of the pie, and devalues their own currency. This is called ‘competitive devaluation’, and more dramatically, ‘currency war’.
 
Such competition can ruin relatively weak countries, as a weak currency means higher import costs. Debt servicing abilities of devaluing countries also get hampered with a weak currency.
 
In this scenario, pundits say Asian currencies would be the worst hit, as any disturbance would lead to an outflow of foreign money from the countries. India has seen its fair share of such outflows, and its currency has also come under immense pressure recently, falling to its lifetime low of 69.10 against the dollar, about a month back.

 
However, on the face of it, it seems that India is still better off than many others. First, foreign access to India’s debt, at less than 6 per cent of the outstanding stock, is lower than many Asian tigers. Second, India’s foreign exchange reserves at $400 billion-plus still give the RBI to stave off pressure on its currency for some time.

Third, India’s political economy seems to be stable after the Opposition was defeated in the no-confidence motion brought against the central government. India’s inflation is well-anchored, thanks to an inflation-targeting central bank. So, in the case of a currency war, India would be pulled down like others, but the fall would be cushioned.