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The revaluation of Chinese currency renminbi is unlikely to affect the RBI’s forex policy, a report from Indranil Sen Gupta, Bank of America Merrill Lynch’s economist, said.
He said there is a limited direct link between the two economies. India’s exports to China, at 4.4 per cent of total exports, are among the smaller of Asian countries. China’s exports to India are barely 3.7 per cent of China’s total exports and 0.7 per cent of China’s GDP.
BofAML FX strategists see the CNY weakening to 6.95/USD (and INR at 70/USD) by December. In his report, he said that history suggests China-India trade deficit is driven far more by India’s demand for engineering goods, and increasingly, electronics, from China, and China’s demand for Indian minerals, rather than CNY-INR movements.
He added: “That said, indirect linkages through financial markets can be quite powerful. We expect the RBI to defend 69/USD for now. If FPI flows do not revive, we would expect it to sell $20 billion ($12 billion so far) in FY19 to fund our 2.4 per cent of GDP current account deficit forecast. If INR crosses 70/USD, we expect the MoF/RBI would trigger NRI bonds, potentially raising $30-35 billion.”
China and India are indirectly linked in several complex ways through finanical markets. For example, India is a key beneficiary if BRIC/EM funds diversify out of what is seen as a slightly risky China. If the perceived China risk rises, Foreign Portfolio Flows (FPI) to emerging markets, including India, dry up hurting the rupee.
Second, a fall in metal prices due to slower Chinese demand, supports the rupee by lowering metal price inflation in India. At the same time, while a potential China hard landing could result in a crash in metal prices, rising global risk aversion would again dry up FPI inflows to emerging markets such as India. Third, FPI inflows will also likely be impacted by Chinese listings in benchmark indices.
Finally, a Sino-US trade war could impact the rupee by appreciating the dollar on risk aversion, he said.
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