While a weakening yuan will put competitive pressure on most Asian currencies given their trade links with China, the risk for the rupee has gone up. By one measure, the relationship between the currencies has climbed to the highest since May 2023, data compiled by Bloomberg show, signaling a decline in the yuan will likely mirror in the rupee’s performance.

The Reserve Bank of India was ready to let the rupee weaken in line with the yuan after Donald Trump won US elections last year. The yuan has declined about 0.6% against the dollar this month, the most among Asian currencies barring the Indonesian rupiah. In contrast, the rupee has fallen about 0.1% during the period.

As China looks to reroute its products after damaging tariffs from the US, concerns around dumping are adding to the woes. That risks further widening India’s biggest trade deficit with any country, with the South Asian nation importing everything from microchips to chemicals and solar panels from China.

The offshore yuan-rupee cross “is probably something the RBI is closely watching,” said Lemon Zhang, FX & emerging-market macro strategist at Barclays Bank Plc. The two countries are increasingly competing for exports of similar products to the world, she said. Zhang sees the currency pair trade in a range of 11.5-12 in the near-term.

The 120-day correlation between the rupee and onshore yuan has become stronger than before, rising to as high as 0.29 this month. The 30-day correlation between the one-month rupee non-deliverable forward and yuan is even higher at 0.66. That adds another layer of challenge for the RBI’s currency strategy as it grapples with the fallout of the ongoing global trade war.

The central bank didn’t respond to an email seeking comments.

RBI Governor Sanjay Malhotra reiterated last week that the central bank will intervene in the FX markets should volatility be excessive or disruptive. This came as the central bank further lowered its key rate to lift India’s economic growth, potentially putting further depreciating pressure on the rupee.

The RBI has loosened its grip on the currency in the recent months, allowing for two-way moves. While the rupee has strengthened a bit after touching successive lows earlier this year, renewed pressure is coming from trade uncertainties.

“The yuan is an anchor currency for Asian markets,” said Sakshi Gupta, principal economist at HDFC Bank. “The RBI may be comfortable with some amount of depreciation if our peers are also depreciating, from a competitiveness perspective.”