Currency market eyes Chinese yuan, sees RBI reserve accumulation

The currency market is still fixated on the Chinese yuan, and sees the Reserve Bank of India’s (RBI’s) reserve accumulation as a way to keep the Indian currency weak to preserve export competitiveness. 

China and the United States have softened their stance on trade tensions, but this is nowhere a resolution, say currency dealers. Even as the yuan appreciated in recent times, from 7.18 a dollar to 7.07 now, there is no guarantee that the crisis is over. 

China has agreed to purchase $40-50 billion of US Agriculture products. While both sides have shown flexibility on tariff hikes, there is an uncertainty regarding tariffs proposed for December. 

“Till such time that yuan doesn’t sustain below 7 a dollar level, there will be considerable pressure on other Asian currencies to match up. From the reserve accumulation, it is evident that the RBI favours gradual depreciation of the rupee to preserve competitive advantage,” said Ritesh Bhansali, vice-president, Mecklai Financial. 

The RBI is absorbing most of the inflows that are coming into the Indian markets. This is being used to boost reserves. As on October 4, the foreign exchange reserve stood at $438 billion. 

“Nationalised banks have been buying dollars since morning. It seems the RBI is trying to protect a range and preventing the rupee to appreciate from these levels. They don’t want rupee to be stronger than the yuan,” said Abhishek Goenka, managing director of IFA Global. 

There could be two reasons for that. “The first is to protect the interest of exporters. A competitive rupee is likely to boost Indian exports and, therefore, at least one of the engines of growth would start firing when the overall domestic growth is subdued,” while the second could be to protect the interest of domestic producers from cheap import substitutes, according to IFA. 

“The real effective exchange rate (REER) is at 117, which implies that the rupee is already overvalued by 4-5 per cent considering the mean REER over the last decade. The level of 10 on CNHINR (yuan-rupee) seems to be the line in the sand as of now. We have seen that the RBI aggressively buying US dollars whenever CNHINR drops below that level,” Goenka said. 

The rupee in recent weeks have weakened rather sharply. On Monday, the rupee fell 21 paise from its previous level to close at 71.23 a dollar. Other Asian currencies were also under some pressure as the dollar index, which measures dollar’s strength against major global currencies, strengthened 0.16 per cent to 98.46.