Brokerages see no major trade hit on yuan fall

Relative out-performance of the rupee looks most likely to continue, said BNP Paribas

Even though the rupee has been under pressure for past two trading sessions, French brokerage BNP Paribas said yuan devaluation will not have a major impact as the country's trade exposure to China is comparatively small and also due to strong balance of payments situation.

"Relative out-performance of the rupee looks most likely to continue," it said in a note issued today.

The rupee had dropped to a two-year closing low of 64.19 against the dollar today after opening at 64.67.

China, facing slowest growth in 25 years, yesterday surprised the global markets and policy makers with a 1.9 per cent devaluation of its already controlled currency yuan.

Today again, the Chinese central bank let the currency fall another 1.5 per cent, creating fears that the world's second largest economy with the largest forex reserves is starting a currency war.

"Not only is India's trade exposure to China comfortably the lowest in the region, but as a substantial commodity importer, India's balance of payments is benefiting from the renewed weakness in oil and gold prices seen in recent weeks," BNP said.

Additionally, there is also the factor of strong external side, it said, adding that the basic balance, consisting of current account and net FDI will be a "healthy surplus for the foreseeable future".

There is also positive news flowing on the FDI side, with announcements like the largest investment by Foxconn over the past weekend.

It identified the Philippines and Indonesia as the other geographies which are least exposed to China, and hence stand at a competitive advantage.

Meanwhile, Singaporean brokerage DBS said the yuan fall will help the rupee add to its real strength.

Stating that the rupee has gained 12 per cent since January under the REER (real effective exchange rate) basis as against a 2 per cent fall against the dollar, it said, "the strength of the rupee on real basis has mainly been a function of global accommodative policies putting downward pressure on their respective currencies, mainly the euro and the yen."

The yuan carries the second largest weight in the rupee on a REER basis, it said, explaining the positives.

"What this means is that yuan's fall will strengthen the rupee on real basis," it said, but added that this will add to policymakers' woes.

"The rupee's relative strength against its trading partners has been of the concern for policymakers due to the need to support India's flagging export growth and underpin government's broader push to revive the domestic manufacturing sector," it said, adding that its economists expect the rupee to depreciate further to 65.60 against the dollar.