Can India withstand further yuan devaluation?

India may have managed to escape from the global stock market tremor caused by the Chinese currency devaluation with just a small jolt on Monday, but does it have the resilience to survive a continuously weakening yuan?

A banker, who spoke on condition of anonymity, said he was very sure that Indian economy did not have that kind of resilience unless major reforms were carried out in full force. "There is low vulnerability (in India right now) because our current account deficit is just 2% of the GDP, which is a buffer for us. This is a very important factor that has kept us insulated from the impact of a weaker yuan. But in the long term, if the Chinese currency continued to devalue, then India's export competitiveness could get hit and would be a cause of concern in terms of trade," he said.

The banker dismissed the view that India's strong fundamentals would keep it within the circle of safety and ward off external dangers. He pointed out that India's fundamentals did not change on Monday, yet its stock markets got affected by external factors. And the minor recovery of around 20% on stock exchanges on Tuesday was also not a solace for him. "If yuan's cycle is repeated further, it could put us in a difficult spot," the banker warned.

Most economists and market observers feel reforms are very crucial for instilling confidence among investors. "If they (reforms) are not carried then both domestic and external risks will play out at the same time and blow up the proportion of economic troubles and make us fragile. It would lessen the confidence of investors in the Indian economy," the banker said.

Anis Chakravarty, chief economist and senior director at Deloitte India, also held that if the yuan could make the Indian stock markets crash, then India was not really insulated. He, however, believes that India has the capacity to bounce back too. "We will get affected by external issues even if we are fundamentally strong, but we are strong to weather it. We adjust very well. Like in 2008, there can be a short term impact but in the mid to long term, there will always be a correction," he said.

He said in the light of the latest yuan devaluation, Indian rupee is slightly stronger against the Chinese currency. This has eroded the competitiveness of the local manufacturers against Chinese players.

"India's competitiveness vis-à-vis China will get hit. We are already facing it in textiles and similar products. It will get further aggravated and the government will need to step in to come up with corrective measures, something like the interest subvention that the government is planning for the textile sector," said the Deloitte economist.

Chakravarty feels India's desire to replace China as the manufacturing hub was aspirational as China's production scale, infrastructure and technology were in different league.

Amit Maheshwari, managing partner at accountancy firm Ashok Maheshwary & Associates, believes a weak Chinese currency will help India as it a net importer with China. He said slowing Chinese demand will not have any impact on India as China was never a consumption market for it. Maheshwari also felt that reforms were fundamental for warding off any thread from currency war that may erupt.