The devaluation of the yuan by the Chinese government for the second day in a row hit global currencies, including the rupee. Though the rupee fell to a two-year low on Wednesday, it was the least affected compared to other Asian currencies. While the Indonesian rupiah and Malaysian ringgit fell sharply, the Australian and New Zealand dollars hit multi-year lows.
The rupee ended at 64.77 to the dollar on Wednesday, 56 paise weaker than Tuesday’s close of 64.21. The yuan devaluation triggered fears of currency wars, which break out when countries compete with one another to achieve a relatively low exchange rate to help boost exports.
“Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan,” said the People’s Bank of China.
Taking a cautious stand, the US Treasury said it would “continue to monitor how these changes are implemented and any reversal in reforms would be a troubling development.”
Knee-jerk reaction NS Venkatesh, Executive Director and CFO, IDBI Bank, said there was a knee-jerk reaction in the currency market due to the yuan devaluation.
“The macroeconomic fundamentals of the country in terms of current account deficit, inflation and fiscal deficit numbers are strong … I expect the rupee to recoup the losses,” he said.
The devaluation combined with a fall in commodity prices hit the CNX Nifty and S&P BSE Sensex; both declined by about 1.3 per cent. The Sensex fell 353.83 points to 27,512 and the Nifty shed 112.9 points to end at 8349. Other Asian markets fell 1-2.4 per cent
Disappointment over delays in key reforms, such as introduction of the Goods and Services Tax, and disruptions in Parliament further aggravated the fall. “Indian markets have fallen more due to the disappointment over the disruption in the reform process. The Government is busy fighting the Opposition. Much of the currency impact has been factored in by the market,” said Deven Choksey, Managing Director, KR Choksey Securities.
India VIX, which indicates volatility, is trading at its highest level since mid-July. On Wednesday, India VIX spiked 9.76 per cent at 17.4450. Foreign institutional investors, already cautious, sold shares worth ₹1,855.22 crore in the cash market and ₹2,500-crore worth index futures.