India's inflation outlook, which faces risks to the upside due to an uncertain monsoon forecast, has benefited from economic struggles in neighboring China, as a sharp appreciation in the rupee against the yuan makes imported goods cheaper.
Bloomberg data shows that from March 31 to June 30, the rupee has appreciated by 6% against the Chinese currency. For the calendar year so far, the rupee's appreciation is at a similar level and taking into account the rupee's gain from the yuan's low in January, the domestic currency has strengthened by 8%.
While slowing Chinese growth has weighed on global economic prospects, given the current trade dynamics, India will benefit from an inflation perspective.
“China is the largest source of our non-energy imports, which means that due to the appreciation of the rupee against the yuan, we will import deflation from China. I think this is under-appreciated in public discussions. It is a The positive thing it will bring is that "core inflation will be lower because imported Chinese goods will be cheaper," said Jahangir Aziz, head of emerging markets economics at JP Morgan.
India's trade gap with China widened to $83.2 billion in the last fiscal, as against $72.91 billion in FY22. Exports to China are set to decline by nearly 28% to $15.32 billion in FY2023, while imports grew by 4.16% to $98.51 billion in the previous fiscal.
The report noted that imports of Chinese goods have been on a steady rise in the current calendar year, rising by 4.6% in January-April to cross $37.86 billion.
deflationary effect
Standard Chartered's Anubhuti Sahai said, "The yuan's weakness basically indicates that China is exporting deflation to the rest of the world and to that extent it will also help India because when it comes to our total imports, especially chemicals It is an important partner in etc. Bank's Head of South Asia Economic Research.
Analysts said that while macro inflation dynamics would be shaped by the spatial distribution of the monsoon, the yuan's depreciation would be icing on the cake if rains due to the El Nino effect do not cause a nasty shock.
"For India's inflation, over the next few quarters, the monsoon story becomes far more important than the external story. Core inflation is well contained. A sharp rise in commodity prices is unlikely in the immediate term. "The theme of low commodity prices is also included in the story," Sahai said.
China's faltering after tighter Covid restrictions, higher returns in the US following an aggressive rate hike by the Fed and slower export demand amid weak global growth have contributed to the yuan's weakness. The Chinese currency fell to a six-month low against the US dollar last month.
Rahul Bajoria, senior regional economist at Barclays, said, "I think this is largely a reflection of a weaker yuan rather than any material change in the dynamics of the rupee. This is something that could help ease inflationary pressures." "
mean reversion
"This has to be watched because we have a big trade relationship with China. It's pretty much a mean reversion. Even in the first half of the year when people were very bullish about the Chinese economy, we saw the dollar-China There has been a significant decline." ," They said.
The Reserve Bank of India's efforts to ensure minimum volatility in the exchange rate of the rupee against the US dollar has also contributed to the movement of the Indian currency against the yuan.
"If the yuan continues to depreciate against the dollar, the rupee will probably appreciate even more against the CNY. If you want to keep the dollar-rupee rate stable at 81-82, the result is that it Have to take steps against your other trading partners. It's arithmetic,'' Aziz said.
The rupee has appreciated by 0.8% against the US dollar so far in 2023, while it depreciated by about 10% last year. Currency traders said that in the past few months, amid heavy foreign inflows into equities, the RBI has been controlling the rupee's gains by buying dollars and replenishing its reserves.
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