Equity markets across the world have bounced back after the initial Brexit shock. It has been a week since British citizens voted to leave the European Union. Indian markets have also regained lost ground.
Brexit was a dramatic moment and we may not have heard the last of it, but an equally important concern is the reaction from the monetary authorities in China in the coming weeks. The Chinese currency tracks the US dollar in a system of managed float. The recent dollar rally has in effect made the yuan more expensive relative to many other Asian currencies.
Many in the market fear that China will soon devalue its currency to prevent a further slowdown in its economy. The strong capital outflow from China must also be considered. Sudden moves in the yuan have unsettled markets in the past. India needs to keep a close watch on Chinese currency policy, especially since $20 billion of deposits have to be repaid in September.