(Bloomberg) -- India is likely to do all it can to ensure the rupee keeps pace with the weakening Chinese yuan in order to protect its export competitiveness, according to Barclays Plc.
The depreciating yuan will put increasing pressure on India given the South Asian nation’s expanding trade deficit with China and the growing similarity in the two countries’ export profiles, Barclays analysts including Mitul Kotecha and Lemon Zhang in Singapore wrote in a research note.
“Moves in the CNH/INR currency pair are far more important from India’s perspective than from China’s,” the analysts said. “India’s sharply worsening trade deficit with China and its much smaller global trade penetration highlight why India cannot let China’s currency weaken disproportionately more than the INR, without hurting India’s trade prospects.”
The offshore yuan has dropped about 2.1% versus the dollar this year, while the rupee has fallen 0.5%. Most of the difference in those moves though took place at the start of the year, with the CNH/INR cross remaining in a relatively tight range since then.
“India will pay increasing attention to the INR exchange rate with CNY in the months ahead,” the Barclays’ analysts wrote. “We think the RBI will not allow INR to break out of the tight range versus CNY established this year amid India’s desire to catch up on the manufacturing exports front.”
Going long the rupee against the offshore yuan offers positive carry, but directional gains from a spot perspective are likely to be limited, with India unlikely to allow any significant deviation from the current range, they wrote.
Barclays expects CNH/INR to trade in range around 11.50 in the weeks ahead, according to the note. The currency pair traded at 11.4869 Friday, having dropped 1.7% this year.
©2024 Bloomberg L.P.
