The rupee fell to a two-year low on Wednesday as China devalued yuan for the second consecutive day, triggering fears about another global currency war.
Chinese authorities unexpectedly devalued the country's exchange rate on Tuesday in a bid to revive the slowing economic activity in the country. China allowed the currency to fall further on Wednesday.
The sharp depreciation led to a quick sell-off in global financial markets, raising concerns over the global economy. The US officials criticised the move saying that its gives unfair advantage to Chinese exports.
The devaluation has led to a sharp fall in Asian currencies such as Indonesia's rupiah and Malaysia's ringgit. Australian and New Zealand currencies have also hit multi-year lows.
Many countries may initiate various measures to arrest the slide in their currencies. The central banks may hike rates or intervene in the foreign markets to check the fall in their currencies, leading to a global currency war.
Here is how India will feel the impact from yuan devaluation:
RBI Rate Cut Pushed Back
Yuan devaluation will further push back expectations on a rate cut by the Reserve Bank of India (RBI), weighing on the already struggling economic activity of the country. RBI may need to keep rates on hold or even hike them to stem the fall in rupee.
Petrol, Diesel Prices May Fall
A sharp depreciation in the Chinese currency could lead to a significant fall in global crude oil prices. Oil prices could take a further hit from yuan fall, as they have been under pressure for the past one year due to oversupply. Indian oil companies may pass the benefits of lower crude oil prices to consumers by cutting petrol and diesel prices. However, fuel price cuts may also depend on rupee movements.
Sensex May See Heavy Losses
Domestic stock markets may come under heavy selling pressure if there is a sustained devaluation in Chinese exchange rate. The benchmark equity index Sensex may see losses due to heavy capital outflows from emerging markets including India.
Exports May Decline
Domestic exports, which have been already slowing for the past few months, may see further decline owing to increased competitiveness of Chinese exports due to depreciation in its local currency.
Inflation May Come Down
A major impact from yuan devaluation will be felt on consumer prices in India. Falling crude oil prices could bring inflation rate further down, raising consumption in the country.