Found some easy interpretation for reasons behind the Chinese Move. Apologies in case the source isn't mentioned.
• China has made a move to shift to a more market-determined exchange rate after more than four months of stifling moves.
• With this, China has obliged the IMF's request to introduce market-oriented reforms on FX.
• Until July 2005, China had a decade-old exchange rate peg against the US dollar. However, since July 2005 it allowed the Yuan to fluctuate within a moving band, at least to some degree.
• On August 11, 2015, it said the daily opening fixing rate of the Yuan will refer to the previous trading day's closing (rather than asking for quotes before market opens). As an opening move, the central bank of China depreciated the fixing rate by nearly 2% to 6.2298 from 6.1162 against the US$.
• Besides making some progress on Capital account liberalization and the FX regime, the recent move is aimed at improving the competitiveness of Chinese exports, after a series of disappointing data-points, esp. very weak trade data. China's exports were down 8.3% y-o-y in July 2015. A significant appreciation of Chinese currency against the major emerging market currencies in recent months added to concerns that China could lose market share to some of its regional competitors.
• The move is also triggered by China's strong wish that Yuan may be included in the IMF's SDR currency basket. In a recent report, the IMF laid out a series of technical steps to allow for Yuan's inclusion in the SDR basket. This is definitely a step in that direction.
• It will pressure China's direct trade rivals, such as South Korea and Japan, to follow suit and let their own currencies fall.
• If China's devaluation deepens, pressure to weaken currencies could become particularly intense in other Asian nations that export large amounts to China or compete with Beijing in other markets. Asian currencies tumbled on Aug 11th, notably the South Korean won, Australian dollar and Thai baht, as investors bet China's move could lead to further monetary easing in those nations.
• The recent move by China could pose a new challenge for the US Fed. A strengthening dollar has already put downward pressure on import prices and broader inflation. Fed officials say they don't want to raise short-term rates from near zero until they are reasonably confident inflation will rise from low levels toward their 2% objective. More upward pressure on the dollar will make that harder to achieve.
• Many emerging market have been suffering from slow growth on the back of weak demand. While slow growth demands lower interest rates and a depreciation bias in their currencies, a competitive devaluation may spark outflows of capital and stock market volatility.
Implications for India
• According to the RBI's latest bulletin, in terms of its fair value, rupee is overvalued by 10-12% (in terms of 36 currencies' basket) in the month of July. So, any depreciation of rupee will certainly be supportive of exports and overall growth. But given the fact that Indian corporates have huge un-hedged FX exposures (~$120 billion), the RBI may not allow rupee to depreciate at a faster pace and by a large magnitude.
• Over the past decade, India's trade deficit with China has widened from $ 2 bln (0.3% of GDP) in 2005 to $ 48.4 bln (2.4% of GDP) in 2015.
• Out of this, the share of imports of Machinery & Electronics from China was 50% in 2015; followed by Chemicals at 13% and Iron & Steel at 8%.
• Interestingly, the imports from China kept on increasing despite a weakening of INR against Yuan over the past decade. This shows that cheaper prices of Chinese products, efficient delivery and domestic constraints encouraged India's imports from China despite the relative (& faster) depreciation of its currency against the Yuan.
• The sectors that will face pressure in India are – Textiles, Chemicals, Metals, etc. Cheaper imports from China would nullify the impact of a safeguard duty on import of long and flat steel products imposed recently.
• According to London-based HSBC Equity Research, Ebitda of Indian steel companies fell 50% in the previous quarter. Although steel companies invested over $12 billion in new capacity, imports have continued to rise steadily. Banks' debt to steel companies in India has crossed $50 billion. It might become a concern for the banking system if the steel sector is not resilient.
However, the eventual impact of Yuan's devaluation will depend on the extent to which it falls. The silver lining is that Chinese companies too have a lot of overseas borrowings, the repayment of which would become more difficult if Yuan depreciates fast. This will act as a limiting factor to Yuan depreciation.