China devalued its currency on August 11 in the backdrop of poor economic data released, saying this is part of a process in its free-market reform. But some suspect the slide could last longer in the exchange rate. China’s exports fell by 8.3 percent in July due to weaker demand from Europe, Japan and the US. China’s economic growth rate has also hit a 25 year low. The yuan is allowed to rise or fall by 2 percent from the midpoint as per the formula based on basket of currencies.
China wants the Renminbi to be a free flowing currency and be a part of the basket of currencies, which is under the Special Drawing Rights (SDR) of IMF that would be used to lend money to sovereign borrowers. The move has impacted various other currencies such as the Australian dollar, Korean Won and Indian rupee.
The Indian rupee slipped to a two-week low of 64.21 against the US Dollar. Rupee is estimated to have fallen by 0.5 percent after the move by China. However, analysts gave a mixed view of the impact on the move by China hurting India. While some said the impact is expected to be negligible, there were others who expressed caution stating that Renminbi’s devaluation may push the RBI to cut interest rates in India. Lower interest rates would discourage foreign investors and that could weaken the rupee further.
The rupee has been falling at a consistent rate and is 5 percent down over the last one year.
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