Yuan emerging as a strong benchmark for rupee, say currency dealers

While it hasn't been officially confirmed yet if RBI is intervening in currency market in tandem with the yuan, the market itself has been adjusting based on how China treats its currency

The Chinese yuan is increasingly becoming the key gauge to determine the movement in rupee-dollar exchange rate, currency dealers say.  

While there is no official acknowledgement yet if the Reserve Bank of India (RBI) is intervening in the currency market in tandem with the movement with the yuan, the currency market itself hasm for some time, been adjusting its positions based on how China treats its currency.  

The reason for this is to preserve India’s export competitiveness. Not only is China an export competitor, but other currencies in the region also readjust based on the movement in yuan.  

“In line with the aim of Atmanirbhar Bharat, there seems to be a conscious effort to not let the rupee get overvalued against the yuan as it would hurt domestic manufacturing,” said Abhishek Goenka, managing director and CEO of IFA Global.  

“We have seen CNY-INR trade in narrow ranges for prolonged periods and those ranges shifting higher periodically. The Rupee has weakened about 14 per cent against the yuan since Feb’2020. There is, therefore, a sense that there could be a soft peg to the yuan,” Goenka said.

According to a report on Economic Times, the central bank could be informally targeting a level of 11.50 for CNY-INR, and also enquired with currency dealers about their option deals on this pair. Business Standard could not confirm it through the RBI or market sources, but currency dealers say this is logical considering the stress on exports. The pair was at about 11.66 on Thursday.

Tracking yuan movement is important for the market because the rupee has recently significantly outperformed its trading peers. On a real effective exchange rate (REER) basis, which measures the local currency’s strength against its export competitors, the rupee has appreciated against 38 countries out of 40 in the basket, economic research firm QuantEco noted.

Even as the dollar index, which measures the greenback’s strength against global major currencies, appreciated 2.9 per cent in November, its largest monthly gain in five years, the rupee appreciated 0.7 per cent. Other emerging markets currencies fell during this time.  

“We estimate this relative outperformance of INR to increase its overvaluation on REER basis to 9.4-9.9 per cent in Nov-21, the strongest level in nearly 4-years,” QuantEco wrote in a report.

“Seen from a historical context, the current negative correlation between the dollar index and USDINR is getting ripe for a reversal. This holds from REER perspective as well, where historical reversals in overvaluation have got triggered in the 8-12 per cent range,” it said.