India vulnerable to further yuan devaluation: UBS

Its senior economist expects yuan to fall to around 6.8 against US dollar by end of 2016 from current level of 6.37

The Indian markets and the rupee remain vulnerable to further yuan devaluation by China, says UBS, which expects the Chinese currency to drop seven per cent before the end of 2016.

“Sometime next year, we might see the RMB (renminbi) being allowed to depreciate again,” said Edward Teather, senior economist, Association of Southeast Asian Nations and India, at UBS Investment Bank.

Teather expects the Chinese currency to fall to 6.8 against the dollar by the end of 2016 compared to the current level of 6.37.

“Should the RMB decline 10 per cent, it will have a meaningful impact across the currency markets,” he said. “The movement will be driven by direct and indirect linkages to China and also by capital outflows.”

Teather said though India doesn’t have much direct linkages to China, it has a lot of indirect linkages, which could eventually hit our domestic economy.

“If the yuan is devalued further in an unexpected manner, the Indian rupee might take a hit and it won’t be helpful for the economy and the market. India doesn’t do a great deal with China, but it does a great deal of trade with countries in West Asia and Africa, that have direct linkages to China,” he said.

In August, the Indian benchmark indices had dropped 6.5 per cent after China unexpectedly allowed the devaluation of the yuan against the dollar. India also saw outflows of $2.5 billion (Rs 16,534 crore) by global funds.

Teather said, like in August, the Indian and some other Asian currencies might fall more than the Chinese currency. However, it might not play out as straightforward if the policymakers intervene, he added.

On the interest rate increase by the US central bank, Teather said it would lead to “short-term adjustment”, as portfolio flows would adjust to the move.

Whenever the interest rate rise takes place, there will be a short-term adjustment and after the currencies and markets will consolidate depending on what they see, he said.