Currency War: How Yuan's Devaluation Will Impact India

China on Wednesday devalued the yuan for a second straight day, leading to over 4 per cent drop in its currency in two days. The devaluation of the yuan strengthened the US dollar, most other currencies were reeling for cover.

The Indian rupee sank to a two-year low of 64.95 per dollar on Wednesday; domestic stock markets also come under selling pressure.

Industry body Assocham said yuan's devaluation could lead to a full-fledged "currency war". For India, the devaluation in the yuan will prove to be a "triple whammy" as rupee volatility will increase, exports will come under pressure and there will be dumping of Chinese goods in India, it added.

Here's How the Yuan Devaluation Will Impact India:

1) Rupee volatility: The sharp fall in the rupee has already rattled stock markets, which fell for a fourth straight session today. If the rupee continues to fall sharply, imports will become costlier, stoking inflation. This will force the Reserve Bank to hold on to high interest rates, which will hamper the ongoing economic recovery. Since India runs a trade deficit (imports are more than exports), chances are the current account deficit will also rise, which will further pressure the rupee. Falling rupee is bad for those companies that have dollar-denominated loans and also for foreign flows because stock market returns become unattractive.

2) Pressure on exports: In normal course, falling rupee would have aided domestic exports, which have contracted for seven straight months until June 2015. However, analysts are betting against a rise in domestic exports because of a global slowdown. The fact that China and India compete for several export items such as textiles, gems and jewellery, etc. will also go against domestic exporters, analysts say. "The large overlap between Indian and China in markets and also products highlights the threat Indian exporters face from China," said DK Pant, chief economist of India Ratings and Research. The economic slowdown in China - which is among the top five countries for Indian exports - is another negative for Indian exporters, analysts say.

3) Dumping of Chinese goods: There's fear that the sharp devaluation in yuan will help China dump goods into the Indian market, which will impact domestic manufacturers. The fear is already playing out on the Dalal Street with tyre stocks and steel makers falling sharply over the last two days.