Thursday April 26, 2018
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The Yuan effect: Pursuing economic reform or global leadership ambition?

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By Gaurav Sharma

On Wednesday, Yuan–the Chinese currency fell to a four year low, sparking global panic in the financial markets. World currencies including the Indonesian rupiah, Singapore dollar, Taiwan dollar, Philippine peso and the Indian rupee declined under the cascading effect of the fall in Yuan.

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The devaluation of the Yuan was part of China’s response to its tepid growth rate and slowing exports and was favored by the International Monetary Fund (IMF) as a “welcome move”. Meanwhile, the Indian markets, like its international counterparts tumbled down sharply in the aftermath. The BSE Sensex, the Indian benchmark index plunged 354 points to close at 27,512, its lowest point in two weeks. The rupee shed 59 points to nearly touch its two-year low of 64.78.

In contrast to IMF’s findings, the devaluation has raised concerns over a brewing global currency war, with accusations being hurled at China for “unfairly” supporting its exporters.

The valuation of currency is determined vis-a-vis the US dollar and all emerging market currencies have nosedived against the global currency standard.

“The rupee is facing competitive devaluation pressure due to devaluation of Chinese Yuan. At a time when the Asian and other global majors are depreciating their currencies to safeguard the export market and the economy, India, with a strong currency is at an economic disadvantage”, says Anindya Banerjee, Vice-President at Kotak Securities.

China is India’s largest trading partner and accounts for a huge chunk of its trade deficit ($48.5 billion). As such price fluctuations in currency rates do not have a direct bearing on the exports, but the loss in competitiveness along with the surge in hedging costs definitely dents overall export scenario.

China contends that the devaluation is only a one-time affair intended to make yuan more responsive to market forces. However, most market players are apprehensive as to the Chinese claims. Exporters fear more measures might be under the works.

According to Ajay Sahai, director general of Federation of Indian Export Organizations (FIEO) estimates that each percentage fall in the rupee negatively impacts exports by 0.3 per cent.

However, economists believe that there has been little or no co-relation between export growth and rupee depreciation. Global demand is thought to be a more credible factor in driving export growth while currency movement plays only a small part.

“The exports have lost competitive edge due to non-price factors such as competitiveness, logistics and infrastructure”, says DK Joshi, chief economist at Crisil.

Still other feels that the decision has more to do with the recent crash in Chinese stock markets, which had sparked suspicions on its fundamental resilience. Some believe that the liberalization of the Chinese currency is in line with its long-term plan to cement its place as the global reserve currency, either with the US dollar or as its replacement.

However, as per official data from the Bank for International Settlements suggest that the Yuan was indeed overvalued. Last year in June, it was up 14 per cent. A year earlier, the figure was up by 20 per cent.

In light of the weakness witnessed by China in the past few weeks, it is but natural for China to take corrective measures. The long-term implications of the steps are also clear, to give Yuan a global face-lift. A bold move indeed by Beijing.

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IMF: Empowering Women Is Smart Economics

IMF says, Getting more women into formal workforce is priority for India

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Ken Kang
Ken Kang. IANS

India must focus as a priority on ensuring that more women work in the formal sector as it continues with labour reforms, according to Ken Kang, the deputy director in International Monetary Fund (IMF) Asia Pacific Department.

While “in recent years India has made very impressive progress in reforms,” he said that “looking ahead there are important policy priorities” and listed three among them.

“One, is to continue improvements in product and labour market reforms with a focus on increasing formal female labour participation to improve the business environment, and reduce complex regulations, but also to address supply bottlenecks, particularly in the agricultural sector and distribution networks,” Kang said at a news conference on Friday in Washington.

As one of India’s major reform achievements, he mentioned the “introduction of flexible inflation targeting and of a statutory monetary policy which has helped to strengthen the monetary policy framework.”

Working woman
Working woman. Pixabay

The Reserve Bank of India Act was amended in 2016, to provide for a Monetary Policy Committee that decides on the interest rate required for achieving the inflation target set by the government in consultation with the bank.

The other achievements include the Goods and Services Tax (GST) and the “major recapitalisation plan for the public-sector banks in order to accelerate the work out of nonperforming loans, as well as made some important legal improvements through a new insolvency and bankruptcy law,” Kang said.

“We expect and hope that the reform momentum continues,” he added.

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“We are not saying that India’s structural reform speed will slow down because of elections,” Changyong Rhee, the IMF director of the Asia Pacific Department said.

“What we are saying is that the growth momentum and the structural reform momentum should continue despite the election period. So there is something misquoted,” he added.

On Thursday, IMF Managing Director Christine Lagarde had said at a news conference on Thursday, according to the IMF transcript: “We have seen and we are seeing — I am not sure that we will be seeing in the next few months given the elections that are coming up — major reforms that we had recommended and advocated for a long time.”  IANS