A deepening slowdown in China threatens to derail India’s economic growth, triggering financial market upheaval and a falling currency, said Vishal Kampani, the nation’s top investment banker.
“If China keeps getting hit like this, the yuan has to devalue and we will see another crisis in India,” Kampani, managing director at JM Financial Ltd, the South Asian country’s top mergers and acquisitions adviser last year, said on Friday in an interview. “I refuse to believe that India will stand out and will look very different.”
Indian equities and currency have suffered along with other emerging markets as Chinese stocks fell extending last week’s plunge, after factory-gate price data fueled concern the economic slowdown is worsening. Falling share prices have revived concern about the Chinese Communist Party’s ability to manage an economy set to grow at its weakest pace since 1990.
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S&P BSE SENSEX Index, India’s benchmark index, fell 0.7 percent at 1:13pm in Mumbai yesterday, extending this year’s losses to 5.2 percent following a plunge in the Shanghai Composite Index. The rupee weakened 0.3 percent to 66.8175 against the US dollar.
The “rupee will get impacted due to devaluation of the yuan and the companies that have to pay back [US] dollar loans will be under stress,” Kampani said. A weakening Indian currency will pose “huge problems” for companies on the subcontinent whose US dollar loans are due for repayment, he said.
Hedging of foreign debt by Indian companies is “less than we would wish,” Reserve Bank of India Governor Raghuram Rajan said in February in an interview with Bloomberg TV India.
“We aren’t going to protect corporations against exchange-rate instability,” he said, adding that the Reserve Bank of India’s focus is on fighting volatility rather than keeping the rupee at a certain level.
Rajan, whose three-year term ends in September, has contended with market volatility since taking office in 2013.
Back then he stabilized a plunging rupee by offering to buy US dollars from banks at discounted rates and vowing to retain confidence in the currency by keeping inflation low and stable. Most of Rajan’s dollar swaps come due toward the end of this year. The nation’s export earnings fell 12 straight months through November.
So far, India has fared better than most emerging-market nations. The World Bank forecasts the South Asian economy would grow 7.7 percent this year compared with China’s 6.7 percent pace, while Brazil and Russia both shrink.
“From a 10-year perspective India remains an interesting place to be,” Kampani said.
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