China in a Currency War?!

The rupee fell to a near two-year low of 64.94 against the dollar on Wednesday with China devaluing its currency yet again by almost 2% in a bid to boost exports and pump up its economy . The rupee closed at 64.81, a drop of 60 paise from its previous close of 64.21.
The sensex fell 354 points to 27,512 over concerns that a weaker yuan would dent the rupee and worries that the parliament logjam would stall reforms. Gold prices, however, surged towards the 26,000 10 gm level after fears over the weakness in the Chinese economy--the second largest after the US. The yellow metal has rallied by almost Rs.1,000 in the last five days.
While any fall in the rupee triggers inflation due to increase in the cost of imported goods, bankers say that the situation is far better than the one in 2013 when the rupee nudged 70-levels following an announcement by the US Federal Reserve that it would start tightening monetary policy . Unlike 2013, prices of co mmodities, particularly crude oil, have come down sharply now. Also, India's external position is much better than it was two years ago.
The rupee's depreciation is expected to benefit software exporters. The S&P BSE IT Index was up 2.6% on Wednesday with Infosys, HCL Tech and Tech Mahindra being among the top gainers. Exporters, particularly those exporting to China or competing with the Chinese exporters, are expected to be badly hit.
There are some who feel that RBI will let the domestic currency gradually drift downward even if it steps in to stem volatility . A steep depreciation of the yuan will deal a further blow to Indian exports, which are battling a slowdown in most markets of the world, as the shipments from the country will further lose competitiveness against the Chinese goods. While the rupee has weakened in the last three days it has been among best performing emerging market against the US dollar.
China's second round of devaluation took the market by surprise.

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