China rate cut may hit Indian exports

In a bid to boost the slowing economy, the People's Bank of China (PBOC) on Friday lowered its one-year deposit and lending rates by 25 basis points each to 1.5% and 4.35%, respectively.

China's central bank also cut reserve requirement ratio for all banks by 50 bps to 17.5% to infuse more liquidity into the system in a bid to boost investments.

The rate cut, effective Saturday, is seen by Indian market players as another measure to depreciate its currency after yuan was devalued twice, starting August 11, by 4.4%.

According to the domestic equity players, the China move will see short-term spurts in Indian equities but sustained bull phase was very much unlikely.

"Globally, there will be a positive reaction as struggling European economies will get a fillip from a revival in China's economy. The impact will also be positive on India too but whether it will be short-term or of a longer term is difficult to say at this moment," said C J George, MD and CEO at Geojit BNP Paribas.

According to a senior executive at a foreign fund, unless an upgrade in ratings occurs, emerging markets like India are unlikely to see any great inflows as corporate earnings so far have been dismal. "Emerging markets are collapsing, though India has a cutting edge, but the worry is now on Indian exports which will lose out to China by the recent measures and the August yuan devaluation," he said.

Many bankers share the view that foreign inflows to India will not show a dramatic rise unless there is a global rating upgrade, besides, exporters may now demand a similar depreciation in the rupee to make exports competitive.

"The ground reality for India is its inability to control inflation and now fiscal deficit too that is showing some early signs of bulging at Rs 3.69 trillion in the April-August period or 66.5% of the annual target. It will take a few more quarters to address these issues. In that sense, India is not all that safe, though not as much at risk when compared with other emerging economies," said the foreign fund manager who preferred to talk on condition of anonymity.

According to a few bankers, China's rate cuts are neither going to help the Chinese economy nor the European economy as the European Central Bank recently said it was prepared to cut rates further and simultaneously continue with its bond buying or quantitative easing to over a trillion euros  by September next.

"ECB increasing QE indicates Europe is definitely not doing well, and the China rate cuts imply the intended investments will certainly not get a boost as the country (China) is already sitting on excess capacity built on anticipated demand," said a senior banker at a private bank.

"In China where excess investments have been already been made such a small rate cut will not boost demand unless there is a sharp cut, say by 2-3%," he said.

This implies that all eyes are now set on the US, which is the only economy showing a steady sign of progress, say bankers.

As for India, following the China cut, unless a rating upgrade happens, external commercial borrowings for corporates will remain at a steeper rate, given their poor earnings so far. Exports will undoubtedly take a beating, given the competitive edge China now has, and the shrinking foreign institutional inflows to emerging economies, including India, will probably worsen given the lack of confidence.