The rupee had touched a low of 65.10 on last Thursday but gained 10 paise to close the week at 65. The Friday rally was fuelled by expectation that the Reserve Bank will cut interest rates after both retail and wholesale inflation plunged to historic lows in July.
Secondly, the fund houses have invested in sectors like steel and textiles, where the domestic companies are competing with Chinese firms.
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The yuan fall will further increase dumping of Chinese steel and textiles. Last year, the share of Chinese steel imports more than doubled to 3.9 million tonnes, according to official data.
Therefore, fund houses feel that any further price cuts of Chinese goods will make domestic companies unsustainable.
UTI MF, which manages $2.5 billion of overseas funds through its Singapore subsidiary UTI International, said it is watching the development.
"It is too early to take any call at the moment, but we are waiting and watching. We do have products which invest in G-secs and even equities," UTI MF Group President (Sales and Marketing) Suraj Kaeley told PTI.
However, the fund houses believe that rupee fall may help the exporters as "decline in the yuan has impacted most emerging markets and Asian currencies and the pressure on the rupee must be seen in that perspective.
"The rupee has been one of the best performing currency for last one year and it will help maintain export competitiveness to our exporters," SBI MF chief investment officer Navneet Munot said, adding "we are underweight when it comes to investing in metals and textiles."
Quantum Asset Management Company, which has invested in sectors like steel and textiles, also said it is watching these sectors closely and will take a call only when the valuation of these sectors goes down significantly.
"We do have invested in domestic steel and textile sectors, where domestic companies are competing with Chinese firms. In case the price of these goods goes down further, then we will have to shift our funds to some other sectors," Quantum AMC chief executive Jimmy Patel said, adding "we are assessing the scenario before we take a call."
Another fund house, Taurus MF, which has also invested in a couple of textile stocks, said, "We have invested in a couple of textile stocks. But we will not take a call based on a single event and rather we will wait and watch," its chief executive Waqar Naqvi said.