Yuan depreciation may augur bad news for Indian exports.

MUMBAI: Indian exports of textiles, engineering and capital goods may suffer if the Chinese currency continues to depreciate, experts warn. The yuan has fallen 4.9per cent against the rupee year to date and may fall further if the Chinese slowdown deepens and the shadow banking crisis and the defaults worsen.

The rupee depreciated by 44per cent against the yuan from 2009-2013, but the trend seems to have reversed in the current year with the rupee gaining 5 per cent year to date. Experts say the extent of yuan's depreciation till date may be too marginal to have any near-term impact, but things could change quickly if the trend continues.

"All commodity companies are likely to get impacted. The Chinese have one of the largest capacities across various commodities. Slowing domestic growth and a weaker yuan will allow them to increase exports, which is a negative for most Indian commodity companies," says Revati Kasture, head of Care Research.

Textiles and engineering goods exports would be affected deeply. At present, 10per cent of yarn produce of India goes to China. If the depreciation in the Chinese currency continues for six more months, India's cotton and yarn manufacturing companies would record a 3per cent-5per cent price decline.

Consistent demand for cotton and yarn from China had increased the revenue of most textile companies by 35 per cent- 40per cent.

Due to the expensive quota system in China and the Chinese government's policy of supporting its farmers by buying cotton at high prices and selling them to farmers, most Chinese companies preferred buying cotton and yarn from India and Pakistan. But, the Yuan depreciation would prompt Chinese companies to buy raw materials from China instead. If cotton prices move up and the yuan depreciates more, Indian textiles companies' margins will be impacted severely.

"In the current financial year, significant rupee depreciation helped our exports to grow in industries such as from falling much. That is a silver lining but a rise in prices appears unlikely in the near term.

On the capital goods side, after the Union government imposed higher import duty on power equipment, big orders in boiler, turbines and generator space had already declined. Chinese companies are active players in transformer, substation, conductor and other peripheral electrical equipments segments. A 5per cent correction in yuan in a weak demand situation is unlikely to affect Indian players' competitiveness but could lower volume growth. Agri- cultural equipment makers, who face competition from China for power tillers and pumpsets, may also see fall in volume growth if yuan depreciates more.

Source : economictimes.indiatimes.com