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A 1 percent fall in rupee Vs yuan may cut India imports from China by 0.43 percent

April 5, 2011

Pressure is building on Beijing again to appreciate the yuan and balance trade more evenly. However this time the voices are closer home, with emerging economies India and Brazil, calling for a drop in trade deficits by imploring China to re-evaluate the people’s currency. India’s trade deficit with China stood at US$19.2 billion in the year through March 2010.

In the paper entitled – ‘The Implications of Renminbi Revaluation on India’s Trade’, S Arunachalaramanan and Ramesh Golait of the Reserve Bank of India, the nations Central Bank have said that an artificially undervalued currency gives China a distinct advantage in the export market. The recently released staff report quoted – “By keeping RMB (renminbi) undervalued against the USD and depreciating it in line with the USD in the international market without taking into account the economic fundamentals of China, it invariably and distinctly provides competitive advantage over its trade competitors and trade partners including India”.

The report by the RBI’s research department, which does not necessarily reflect the view of the central bank’s management, warned against a growing reliance on Chinese imports, which rose to 10.7 percent of all Indian imports in 2009/10 from 7.3 percent five years earlier.

“Given the fact that the policies of China are export-oriented, pro-FDI (foreign direct investment) and keeping the exchange rate undervalued etc., the emerging market economies which have allowed their currencies to float will have to face distinct issues in their management of balance of payments,” the RBI paper added. India’s rupee is partially convertible.

China has intervened in the foreign exchange markets by an average of US$1 billion a day for the last five years, buying dollars and keeping the greenback expensive, while selling the yuan to keep their own currency cheap. It has built a huge reserve of US$2.5 trillion in the process.

Chinese imports to India have risen significantly to 10.7 percent in 2009-2010 from 7.3 percent five years ago. The bulk of the imports comprises of electronic and machinery goods, which are on the rise and form more than 40 percent of the total.

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