Devalued yuan will hit global monies, says Subramanian

A day after China steeply devalued its currency following a sharp fall in exports and continuing weakness in its economy, India on Wednesday cautioned that policy makers the world over will have to take note of Beijing’s action.

China’s biggest devaluation since 1994 has sparked fears of global currency war. Share markets in most parts of the world tumbled on fear of action from central banks of major economies to shield their industry from a flood of cheaper imports.

BSE Sensex, too, ended 1.27 per cent down and the rupee came close to touching Rs 65 a dollar at one point in the day before recovering a bit.

“There is no doubt that China is responding to its own internal development of slowing down of growth and exports in order to give its economy a boost. All of us policymakers around the world, including India, have to take notice of this action,” said Chief Economic Advisor Arvind Subramanian. He, however, refused to comment on the impact of Yuan devaluation on India and its exports.

China devalued its currency yuan also called Renminbi by 1.9 per cent on Tuesday and again on Wednesday.

The International Monetary Fund (IMF) welcomed China’s move to make the yuan more responsive to market forces.

Beijing has been lobbying with the IMF to include the yuan in its basket of reserve currencies known as Special Drawing Rights (SDR), which it uses to lend to sovereign borrowers. The latest devaluation would mark a major step in terms of international use of the yuan.

“This action is both an endeavour to make yuan a more plausible credible candidate for inclusion in the SDR basket,” said Subramanian.

Currently, the SDR basket contains only four currencies–sterling, euro, US dollar and Japan's yen. The IMF has said that “significant work” is needed for the yuan to be added to the group.

The latest IMF review postponed a decision on the currency’s inclusion in the SDR basket till September 2016.

On Indian economy, Subramanian said, it was witnessing improvement across all sectors as reflected by a healthy 37 per cent increase in indirect tax collections during the first four months of current fiscal.

“These collections indicate that the underlying momentum in the economy continues to improve across all sectors and suggests healthy increase in nominal GDP growth,” he said.