Will depreciating Yuan take toll on other Asian currencies?

China actively wants to weaken its currency, but it is unlikely to be a long-term trend and may last for few weeks, he added. Meanwhile, he doesn’t see other Asian currencies taking a hard hit on yuan’s move as of now.

Below is the edited transcript of Mitul Kotecha’s interview with CNBC-TV18’s Latha Venkatesh and Sonia Shenoy.

Latha: How are you reading the yuan depreciation? What should Asian currencies take from this development?

A: The part of this move is engineered and the view that we have here is that China wants to provogue more two-way risk in the currency; they also want to increase volatility and certainly wants the market to stop this very strong inflows that were being recorded in January. So, what happened was a significant inflows of capital led to real concern. The currency was becoming one way bet and that is why we are seeing this volatility. China is pushing now to weaken their currency as it comes against the backdrop of weaker economic growth. It is also perhaps is a prelude to a band widening because if China widens the band, it means they want the currency to fluctuate more.

Latha: But despite a lot of inflows if the currency is depreciating, it means an active role on the part of the Chinese authorities to keep it depreciated so you would expect less appreciation of the yuan hereon. This is something – at least Indian trading companies will be worried about exporting companies. Would there be an active resistance to appreciation?

A: It is definitely an active policy, there is no doubt here that China actively wants to weaken their currency. Now whether this is going to be a very long-term trend? It is unlikely. We are going to see this perhaps continue for the next few weeks, but eventually we will see a stronger currency. Our forecast for the Chinese renminbi by the end of this year against the US dollar is 6. So, this weakness is temporary, but it could last for few weeks to come.

Sonia: So, will this have any kind of impact for Asian currencies or currency like the rupee or do you see it largely restricted to the yuan?

A: At the moment it is largely restricted to the yuan. There is perhaps some concern or more closely trade oriented currencies with China such as Korea or Taiwan but the impact has not been widespread; currencies which have been rather well-behaved. So, it is a case where the impact is less significant, but that being said given there are concerns about the economy and about how weak growth could be and where would this weakness in the currency is reflecting from underlying growth concerns – that could have more of a negative impact on Asian regional currencies in the weeks ahead, so I wouldn’t rule out a bigger impact for currencies in Asia.