A further devaluation of Chinese yuan may make it difficult for India to maintain its pace of monthly exports as demand for Indian goods is likely to contract, India Ratings and Research said today.
"The devaluation of the Chinese yuan will help increase the competitiveness of Chinese exports, however a further decline in the currency may make it difficult for India to maintain its pace of monthly exports at USD 22 billion," India Ratings and Research (Ind-Ra) said in a report.
It said the overall slowdown in China is likely to take a toll on companies, which have links to the Chinese economy.
"Chinese demand for Indian goods is likely to contract further due to the decline in the overall demand in the world's second largest economy," it said.
Faced with exports shrinking 8.3 per cent in dollar terms in July, China devalued yuan by record 1.9 per cent to 6.23 per dollar, its lowest point in almost three years.
The move led to rupee falling the most in two weeks against dollar. It dropped to a two-month low of 64.19.
The Chinese economy, which has high trade linkages to growth, has devalued its currency leading to a further widening of trade competitiveness for Indian exporters it said.
Ind-Ra said although the Bank of China has stated that this is a one-off move, however, history shows that currency devaluations are followed by a series of such moves.
While China is battling with falling exports, globally exports have also been sliding. This decline in global demand is putting pressure on the export-driven Chinese economy.
India's exports, which have contracted for seven straight months until June 2015, are likely to come under further pressure from Chinese exports.
China is the world's largest exporter and its exports formed 13.7 per cent of the global exports and close to one and half times United States' exports last year.
India's exports are a mere 1.9 per cent of total world exports and close to 14 per cent of China's exports.
"Trade linkage to growth in China is high and hence it is facing the heat of falling global demand. With global demand contracting, emerging markets are looking to grab pieces of the shrinking global trade pie," Ind-Ra said.
India's key items of exports are petroleum products, gems and jewellery, chemicals and textiles. Key markets for Indian exporters are EU, USA, UAE, Hong Kong and China.
Top Chinese exports include clothing, gems and jewellery, base metals and machinery which are some of the key items that India also exports. Key markets for Chinese exports are EU, the US, Hong Kong, Japan and South Korea.
"The high overlap in markets and also products highlights the threat Indian exporter's face from China. China is also among the top five countries for Indian exports," Ind-Ra said.
