A weaker yuan impacts countries like India, which trade heavily with China. Cheaper Chinese goods make it harder for Indian businesses to compete, while the Indian rupee often adjusts alongside the yuan to maintain trade competitiveness. This prevents Indian exports from becoming too expensive compared to Chinese goods.
In 2024, for instance, when the yuan depreciated 3%, the rupee also depreciated by 3%, moving from about ₹83 to ₹85.5 against the dollar.
Also Read: Why a weaker rupee is not necessarily a bad thing
The Indian rupee had been holding steady this year, with the Reserve Bank of India (RBI) stepping in to stop it from weakening beyond ₹85.5 against the US dollar. However, with the yuan losing value, the rupee breached this level and is now set for further drop.
Also Read: Rupee slips to record low on January 6
At the same time, the US dollar is getting stronger with the dollar index at nearly 109. US government bonds are also offering good returns, with 10-year yields at 4.62%, attracting global investors. This has drawn funds away from emerging markets like India, adding to the pressure on the rupee
Why a weak rupee affects foreign investors
When the rupee weakens, it becomes less attractive for foreign investors to keep their money in Indian stocks because their profits shrink when converting rupees earnings back into dollars.
For example, suppose an investor buys shares worth ₹1,00,000 when the exchange rate is ₹80 per US dollar. They invest $1,250 (₹1,00,000 ÷ 80). If the shares grow by 10%, the value rises to ₹1,10,000. If the rupee remains stable at ₹80 per dollar, the investor would get $1,375 (₹1,10,000 ÷ 80), making a dollar profit of $125. However, if the rupee weakens to ₹85 per dollar, they receive only $1,294 (₹1,10,000 ÷ 85), shrinking their dollar profit to just $44.
This reduced profit discourages foreign investors, leading to a sell-off and putting additional pressure on Indian markets.
Indian market impact
The ripple effect from the yuan’s depreciation has contributed to selling by foreign portfolio investors (FPIs) in India, and is among the reasons for a big drop in the Indian equities on January 6.
At 1.50 pm today, the benchmarks, Nifty 50 and Sensex, were down over 350 points and 1,200 points, respectively.
In August last year, the unwinding of the Yen carry trade following the Bank of Japan’s interest rate hike had also impacted flows, similarly weighing down the Indian markets.
Also Read: How unwinding of Yen carry trade spooked global markets
The big worry now is that China’s yuan could weaken further, especially after Trump assumes office on January 20. If this happens, the rupee is likely to face continued depreciation.
Barclays projects the yuan to reach 7.5 against the dollar by year-end and the rupee to slide to 87.
Any further weakening could trigger further capital outflows from Indian markets, leading to deeper declines in stock prices.