2023-07-04 18:46:03
Mumbai: India’s inflation outlook, which faces upside risks from an uncertain monsoon prognosis, has gained an advantage from the economic struggles of neighbouring China, as a sharp appreciation in the rupee versus the yuan cheapens the price of imported goods.
From March 31 to June 30, the rupee has appreciated 6% versus the Chinese currency, Bloomberg data showed. For the calendar year so far, the rupee’s appreciation is at similar levels and taking into account the rupee’s gains from its lows versus the yuan touched in January, the domestic currency has strengthened as much as 8%.
While slowing Chinese growth has cast a shadow on global economic prospects, given the prevailing trade dynamics, India stands to benefit from the inflation perspective.
“China is our biggest source of non-energy imports, which means that because of the appreciation of the rupee once morest the yuan, we will be importing China’s disinflation. I think that is less appreciated in public discussions. That’s a positive – it will bring down core inflation because imported Chinese goods will be cheaper,” said Jahangir Aziz, head of emerging market economics at JP Morgan.
India’s trade gap with China widened to $83.2 billion in the last fiscal as once morest $72.91 billion in FY22. Exports to China dipped by regarding 28% to $15.32 billion in FY23, while imports rose by 4.16% to $98.51 billion in the last fiscal.Imports of Chinese goods have continued to grow in the current calendar year, rising 4.6% in January-April and crossing $37.86 billion, reports said.Disinflationary Impact
“Yuan weakness basically indicates that China is exporting deflation to the rest of the world and to that extent it will also help India because it’s an important partner when it comes to our total imports, especially in chemicals etc,” said Anubhuti Sahay, Standard Chartered Bank’s head of South Asia Economic Research.
Analysts pointed out that while the broader inflation dynamics would be shaped by the spatial distribution of the monsoon, the depreciating yuan was akin to the icing on the cake if the rains were not to throw up too unpleasant a shock due to the El Nino effect.
“For India’s inflation, in the next few quarters, more than the external story, the monsoon story becomes far more important. Core inflation is well-contained. A sharp pick-up in commodity prices looks unlikely in the immediate term. The exchange rate story adds over and above the low commodity price theme,” Sahay said.
A faltering Chinese re-opening following strict Covid restrictions, higher returns in the US following aggressive rate hikes by the Fed and slower demand for exports amidst weakening global growth have all contributed to the yuan’s weakness. The Chinese currency dropped to a six-month low once morest the US dollar last month.
“I think it’s largely a reflection of a weakening yuan rather than any material change in the rupee dynamics. It is something that may help in blunting inflation pressure,” said Rahul Bajoria, senior regional economist at Barclays.
Mean Reversion
“It’s something to be watched because we have large trading relationships with China. It is largely a mean reversion. Even in the earlier part of the year when people were very bullish on the Chinese economy, we saw the dollar-China move down a lot,” he said.
The Reserve Bank of India’s efforts to ensure minimum volatility in the rupee’s exchange rate versus the US dollar have also contributed to the Indian currency’s move once morest the yuan.
“If the yuan continues to depreciate once morest the dollar, the rupee is going to appreciate probably even more once morest the CNY. If you want to keep the dollar-rupee rate stable at 81-82, then the corollary to that is that it has to move once morest its other trading partners. That’s arithmetic,” Aziz said.
The rupee has appreciated 0.8% once morest the US dollar so far in 2023 as once morest a depreciation of around 10% the previous year. Currency traders said that over the last couple of months, amid heavy foreign inflows in equities, the RBI had been keeping the rupee’s gains in check by purchasing dollars and replenishing its reserves.
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