August 26, 2015

The Latest Currency War Entrant: India Warns May Retaliate To Chinese Devaluation

When China moved to devalue the yuan earlier this month, it was seen by virtually everyone for exactly what it was: a tacit admission that the country’s economy was in freefall and a desperate attempt to boost exports stinging from REER appreciation of more than 14% in just a little over twelve months.

Of course coming out and accusing China of entering the global currency wars for the sole purpose of supporting the export-driven economy isn’t something that’s politically correct and if you’re China, you want to deflect that criticism so naturally, there was plenty of polite talk about the need to allow the yuan to move in a more market determined way and that rhetoric squares nicely with China’s SDR inclusion hopes.

Ultimately though, trade competitiveness is now front and center in everyone’s minds, especially Asia ex-Japan nations who will now see their respective REERs appreciate even as the weaker yuan means demand from the mainland will be suppressed.

And while we’ve talked plenty about the impact on Asia-Pac and LatAm (especially Brazil, where the trade ministry immediately acknowledged the adverse effect of the yuan deval), we haven’t yet mentioned India where yesterday, in the midst of the turmoil, Central bank governor Raghuram Rajan sought to calm nervous markets by reassuring the world that India is not, for now anyway, in any danger thanks to ample FX reserves and a low CA. Here’s more from Reuters:


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