Rupee may weaken further on China currency depreciation: Citigroup

New Delhi: India seems to be less vulnerable to China's currency depreciation through direct channels, but the rupee may still weaken, says a Citigroup report. According to the global financial services major, the surprise element associated with the yuan's depreciation may force investors to liquidate their positions across markets. "It is through this channel that long investor positioning in Indian assets including Indian rupee may come under pressure.

Hence, even as the Indian rupee may outperform  other vulnerable emerging market currencies, it may weaken  against the US dollar," Citigroup said in a research note.  The rupee is currently hovering around Rs 65/USD at  2-year lows. It has slipped significantly in the last few  trading sessions. "India screens less vulnerable to China's currency  depreciation through direct channels, but INR may still  weaken," the report said.  Faced with sluggish economic growth and dwindling  exports, Chinese apex bank decided to devalue its currency,  following which yuan has fallen almost 4 per cent in two days.  According to Citigroup the Indian rupee is likely to  adopt to a new fair value, "so as to not tighten the overall  monetary conditions incrementally". 

China's surprise decision to devalue the yuan sparked a  sell-off in global currencies. The ones that were worst hit  were those from economies whose exporters either rely on  Chinese companies to buy their products or compete with their  exporters for customers.  "Taking into account the actual depreciation in Chinese  currency, we estimate that the fair value of Indian rupee  based on productivity adjusted REER has shifted to 64-65 range  from 63.5-64.5 earlier," Citigroup said.

In the event of further devaluation in the Chinese  currency, the fair value could shift higher to 64.5-65.5  range, it added.  The Citigroup report further said that a weaker Chinese  currency with respect to Indian rupee could make imports of electronics goods including telecom equipment, industrial  machinery, steel and fertilizer - more competitive and could  impart further disinflation in manufactured products.  "India's BoP situation remains favourable on account of  low crude prices and robust FDI flows, but in an environment  of widespread emerging market depreciation ? competitive or  otherwise perhaps RBI will be less averse to weaker Indian  rupee in the short run," the report added.