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Yuan devaluation may wreak havoc on rupee, says expert

The rupee closed at 70.82 versus dollar, down 9 paise from the previous close. It had touched a high of 70.47 in intraday trade, a rise of 26 paise over its previous close

Aprajita Sharma       Last Updated: August 6, 2019  | 19:42 IST
Yuan devaluation may wreak havoc on rupee, says expert

Defying global sell-off, the Indian stock market settled in positive terrain on Tuesday after China on Monday devalued the yuan beyond the key 7-per-dollar level for the first time in more than a decade. The rally in the market came after China refrained from devaluing the currency even further as the United States labelled it as 'currency manipulator'. The rupee, though traded strong against the dollar all through the day, it pared intraday gains to settle lower. It had suffered its biggest fall in six years the previous day after losing 1.63 per cent to close at 70.74 to a dollar.  

"Intraday gains in rupee may have come on the back of RBI intervention and gains in the equity market ahead of RBI policy meeting tomorrow," said Rushabh Maru, research analyst - currency and commodity, Anand Rathi Shares and Stock Brokers. "Any further depreciation in yuan may wreak havoc on the rupee," he cautioned.

The rupee closed at 70.82 versus dollar, down 9 paise from the previous close. It had touched a high of 70.47 in intraday trade, a rise of 26 paise over its previous close. Maru sees the currency slipping to 71-mark in the near-term as trade war between US and China looks set to degenerate into currency war even as China soothed market's nerves on Tuesday.  

Meanwhile, Anand James, Chief Market Strategist at Geojit Financial Services says China's move on currency devaluation is significant as it signals strong directional moves coming in from the country amid ongoing posturing between US and China. "In response, not only Indian rupee, but also other major emerging market currencies such as Indonesian Rupiah and South Korean Won weakened against dollar," he said.

James sees rupee depreciating to 71.4-72 in the short-term. "Looking ahead, the continued preference for foreign interest in India's bonds will be key with market sentiments tilting in favour of monetary policy easing from the RBI."

The United States on Monday labelled China as the "currency manipulator" as trade war between both the countries intensified after a breather of over a month. Earlier this week, President Donald Trump abruptly announced that beginning 1 September he would impose a 10 per cent tariff on additional $300 billion in Chinese imports that are not yet subject to US duties. China retaliated by announcing that Chinese companies have stopped purchasing US agricultural products. China is one of the largest buyers of US agriculture products.

On Tuesday, the People's Bank of China (PBOC) maintained the daily mid-point of the currency's trading band below 7 per dollar against market expectations. It denied Washington's allegations of currency manipulation, saying the country would not depreciate the currency just to stay competitive.

The benchmark Sensex added 277 points to settle at 36,976.85, while the Nifty50 closed at 10,948.25. On Monday, the Sensex had fallen over 600 points in intraday trade reacting to yuan devaluation and back home the government's move to abolish Article 370 that gave special status to Jammu and Kashmir. The restricted fall in the market was a stark contrast to 'Black Monday' in August 2015, when the 30-share index had plunged as much as 1,624 points after a surprise devaluation of the yuan sent shivers down the spine of global equity markets.

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