InvestorQ : Should India be bothered if the Yuan weakens and what does it mean for the Indian rupee?
rhea Babu made post

Should India be bothered if the Yuan weakens and what does it mean for the Indian rupee?

3 years ago

To answer your question; yes Yuan is a worry for the world and for India also. Especially, emerging markets are likely to be the worst hit by the Yuan weakening. A weak Yuan can be a global challenge for two basic reasons. Firstly, if China gets declared as a currency manipulator, then it could really give a shock to global currency market since the Yuan is part of the IMF basket. China also holds nearly $1.3 trillion in US dollar treasury holdings, which it could use as a bargaining chip to create chaos in currency markets. Let us now turn to India. For countries like India, the immediate problem is a weakness in the INR. Since the CNY problem began, the INR has fallen from 69/$ to nearly 71/$. That has serious repercussions for FPI flows, which has anyways been on a downswing since the Budget. When the rupee weakens, most FPIs are wary of investing in India for fear of losing the dollar value of their investments.

Actually, the world is also worried about a currency war

The real worry for the economies like India and the rest of the world is that it could trigger a vicious currency war. We have not seen a full-fledged currency war in the last 100 years and such Chinese action could trigger a big currency war. In a currency war, each nation tries to boost exports by lowering the value of its currency and the tragedy of any currency war is that there are no winners; only losers. Currency wars typically lead to a weaker currency, lower output and major contraction in the economy. That is what the world markets are really worried about.