How China’s currency move could have intensified the sell-off in the Indian stock market

China’s central bank, the People’s Bank of China (PBOC), allowed its currency, the yuan (also called the renminbi), to weaken above a critical level of 7.3 against the US dollar on January 3. This means that it now takes more yuan to buy one dollar. This decision had the opposite effect, increasing and contributing to uncertainty in global markets Indian benchmark indices are down more than 1.5% each January 6.

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A weaker yuan affects countries like India that trade heavily with China. Cheaper Chinese goods make it harder for Indian companies to compete, while the Indian rupee often realigns with the yuan to maintain trade competitiveness. This will ensure that Indian exports do not become too costly compared to Chinese goods.

For example, in 2024, when the yuan depreciated by 3%, the rupee also depreciated by 3%, moving away from approx. ₹83 to ₹85.5 against the dollar.

The Indian rupee has held steady this year and the Reserve Bank of India (RBI) has stepped in to stop it weakening further ₹85.5 against the US dollar. However, with the depreciation of the yuan, the rupee has crossed this level and is now expected to decline further.

At the same time, the US dollar is strengthening, with the dollar index almost 109. US government bonds also offer good returns, with the 10-year bond yield standing at 4.62%, attracting investors from all over the world. This has diverted funds away from emerging markets such as India, increasing pressure on the rupee

Why Weak Rupee Affects Foreign Investors

When the rupee weakens, it becomes less attractive for foreign investors to keep their money in Indian stocks as their profits decline when they convert their rupee earnings back to dollars.

For example, suppose an investor buys shares worth ₹1,00,000 when the exchange rate is ₹80 to the US dollar. They invest $1,250 (₹1,00,000 ÷ 80). If the shares increase by 10%, the value increases to ₹ 1,10,000. If the rupee remains stable at ₹80 per dollar, the investor will receive ₹1,375 (₹1,10,000 ÷ ₹80), which means a profit of ₹125. However, if the rupee weakens to ₹85 per dollar, they will receive only ₹1,294 (₹1,10,000 ÷ ₹85), reducing their dollar profit to just ₹44.

Reduced profits discourage foreign investors, leading to a sell-off and putting additional pressure on Indian markets.

Impact on the Indian market

The ripple effect of the yuan depreciation contributed to selling of shares by foreign portfolio investors (FPIs) in India and is one of the reasons for the large decline in Indian equities that occurred on January 6.

Today at 1:50 p.m. benchmarks, Nifty 50 and Sensex, fell over 350 points and 1200 points respectively.

Last August, a slowdown in the yen carry trade following the Bank of Japan’s interest rate hike also affected flows, similarly weighing on Indian markets.

The biggest concern right now is that the Chinese yuan may weaken even further. If this happens, the rupee is likely to continue to depreciate. This could mean more money leaving Indian markets, causing share prices to fall further.