Nepali rupee plunges to 23-month low following yuan devaluation

KATHMANDU, August 13

Nepali rupee has started coming under pressure following China’s decision to devalue the yuan.

On Thursday, Nepal Rastra Bank fixed the reference selling rate per US dollar at Rs 104.04. By the time markets open tomorrow, the reference rate will stand at Rs 104.36.

The rates of the last two days are the lowest since September 2013. Nepali currency is under pressure because Indian rupee, with which Nepali currency is pegged, has been weakening since the Chinese central bank decided to devalue yuan by 1.9 per cent on Tuesday — the most significant downward adjustment since 1994.

China’s latest currency decision has sparked a sell-off in global currencies, including that of Indian currency.

But good news is that the market turmoil created by yuan’s devaluation has finally started to subside.

“Though the yuan opened slightly weaker on Thursday, the spot rate was only about 0.1 per cent below the guidance rate,” Reuters reported.

Spot yuan closed at 6.399 to the dollar on Thursday, down 0.2 per cent from yesterday’s closure, and almost level with the guidance rate, Reuters said.

The spot rate is allowed to trade within a range of two per cent above or below the guidance rate.

Before Tuesday, the Chinese central bank used to arbitrarily fix the guidance rate for yuan every day. Since that day, the Chinese central bank has not abandoned fixing the rate, but has said the rate would be fixed based on market rate of the previous day.

This technically means the market, and not the Chinese central bank, from now on will determine the rate at which yuan will be traded every day.

The Chinese central bank tried to drive home this point on Thursday, as it said there was no reason for the yuan to fall further given the country’s strong economic environment, sustained trade surplus, sound fiscal position and deep foreign exchange reserves.

As a result, fears of a global currency war eased on Thursday and shares rose in Asia and Europe, Reuters said.

Despite these feel-good factors, Citigroup has said Indian rupee may still weaken because yuan’s depreciation may force investors to liquidate their positions across markets, exerting pressure on those who have exposure to Indian assets, including Indian rupee.

“Hence, even as the Indian rupee may outperform other vulnerable emerging market currencies, it may weaken against the US dollar,” The Economic Times quoted Citigroup as saying in a research note.

If this prediction comes true, Nepali rupee will further weaken. For countries like Nepal that have a wide trade deficit, currency depreciation, theoretically, should come as good news, as it boosts export competitiveness.

Nepal’s trade deficit has been widening rapidly every year because of over-dependence on imports. Now with the currency’s slump, Nepal has an opportunity to mend this, as foreigners buying Nepali goods stand to get more of Nepali rupees for every dollar they exchange, making domestic goods cheaper for them.

Yet Nepal may not be able to capitalise on this opportunity, because the country’s export potential has been eroding due to power shortage and other structural problems.

So, continued growth in imports will only stoke inflation, as the country will have to pay more of domestic currency while purchasing foreign goods priced in US dollars. Amidst this situation, recipients of workers’ remittance appear to be the only gainers as they will get more of Nepali currency while exchanging money sent by overseas migrant workers.

But that is also unlikely to happen this time as the currency of major Nepali labour-absorbing country — Malaysia — has also weakened. Now, one has to fork out around four Malaysian ringgit to fetch a dollar, as against just under three ringgit several months ago.