(Bloomberg) — India’s central bank is prepared to let the rupee weaken along with China’s yuan after Donald Trump’s election victory stoked fears of higher U.S. rates, according to people familiar with policymakers’ thinking.
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A devaluing yuan will lower the cost of Chinese goods, potentially leading to more imports and further widening India’s largest trade deficit with any country. The Reserve Bank of India is ready to cushion the blow by allowing a weaker rupee even as it uses its ample reserves to control the decline, said the people, who asked not to be identified due to sensitivity of the case.
Analysts have already started revising their rupee forecasts. According to HDFC Bank Ltd. the currency will cross the 85 per dollar mark within 12 months, while IDFC First Bank Ltd. expects the price of 84.50 to be well ahead of the previous March projection.
The rupee closed at 84.3750 on Friday, posting its biggest weekly loss since May. Yet it is one of the world’s least volatile currencies, with the RBI using its substantial foreign exchange reserves – now the world’s fourth largest at over $680 billion – to limit the rupee’s sharp swings.
China is bracing for further yuan weakness if newly-elected US President Trump makes good on his promise to impose tariffs of as much as 60% on Chinese goods. The impact will be reflected in currency weakness and trade flows across Asia. Keeping the rupee in check in such a situation could further widen India’s trade gap with China after it doubled in the last three years to nearly $83 billion by 2023.
“Given concerns over overvaluation and to keep the rupee competitive – especially with a weakening yuan – the central bank may prefer an orderly depreciation of the rupee over the coming year,” HDFC Bank economists led by Abheek Barua wrote in a note.
India wants to boost its manufacturing sector by attracting companies looking to move supply chains out of China. To do that, policymakers need to keep the rupee competitive against its peers. India had just started capturing export market share from China in sectors such as electronics exports.
A central bank spokesperson did not respond to an email seeking comment.
The rupee has been trading in the 11.50-12 band against the yuan for most of the year. Both currencies have largely depreciated against the dollar so far in 2024: the yuan is down 0.9%, while the rupee is down 1.4%.
The previous tariff war during Trump’s first presidency saw the yuan fall 11.5% against the dollar in 2018-2019, offsetting two-thirds of the rate increase, according to Morgan Stanley. During the same period, the rupee fell by 11.2%.
“The RBI has gently pegged the INR to the CNY amid 40% bilateral trade deficit with China and the INR is unlikely to float naturally,” said Madhavi Arora, chief economist at Emkay Global Financial Services Ltd.
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