The Chinese yuan could be the key to deciphering when and how much the central bank intends to intervene in foreign exchange markets.
The rupee and yuan, which determine India’s export competitiveness relative to its trading partners, have become more closely linked than the dollar in recent weeks, currency traders said.
Abhilash Koikkala said, “We are currently more pegged to the renminbi compared to the US dollar because if you look at the three-month chart, compared to the dollar index and other currencies, what is happening in China is This is because it is working in conjunction with other things.” Head of Foreign Exchange and Commodities at Nuvama Group.
“There is no doubt that China is trying to keep the renminbi within a narrow range so as not to undermine export competitiveness,” he added.
The renminbi/rupee exchange rate stood at 11.50 on Wednesday, compared to 11.52 a month ago.
A senior finance ministry official at a major private bank believes the pattern of the central bank’s intervention strategy indicates it may want to keep the yuan/rupee near $11.50.
On March 22, the Chinese yuan depreciated against the US dollar, breaking above the psychologically important 7.2 yuan to the dollar on expectations for further easing of monetary policy. As a result, the Chinese yuan has fallen to its lowest level since November 17, 2023.
For India, a devaluation of the yuan against the rupee will only make its products cheaper and increase imports from China. India’s trade deficit with China was $83.2 billion in 2022-23, accounting for more than 30% of India’s overall trade deficit. Experts believe this range is likely to widen further if the rupee is pegged to the yuan.
“If India is looking to increase domestic manufacturing export capacity, that doesn’t seem like a very favorable scenario,” said Dheeraj Nim, economist and currency strategist at ANZ Banking Group.