India should allow its currency to slide, says a Assocham study, else Indian exports will suffer at the hands of China and other emerging countries witnessing corrections in their currencies.

The RBI should use its foreign exchange reserves to defend the currency only if there is a rout situation. In the meantime, India must also ensure that its exports need to get back their competitiveness even in the midst of the global slowdown.

The major challenge is coming from China in various forms with a sizeable influence on currency valuation. Yuan devaluation will negatively impact Indian firms, which have export exposure to China in sectors such as tyres, pharmaceuticals, steel and organic chemicals textiles due to a volatile change in the terms of trade. The devaluation will make Indian exports expensive.

With a sharp reduction in the prices of primary commodities, which India ships out, export value is bound to decline in a disproportionate manner to imports since the inward shipments comprise capital, telecom and manufactured goods. In 2014-15, the trade imbalance increased by over a third from the previous year. This large trade deficit is essentially a reflection of India’s inability to penetrate the Chinese markets, a problem that seems to have aggravated over the past three years.