|Not just a yuan|
|Monday, 19 September 2011 00:00|
India’s trade with China is projected to touch $100 billion by 2015. And this target might be reached even earlier. Within the current volume of $60 billion, more than $16 billion is accounted for by imports of machinery and project imports. It is inconceivable that this element of trade can run smoothly without the intermediation of local currencies—in this case, Chinese yuan (renminbi). The surprise about last week’s announcement by the government to allow India Inc to borrow up to $1 billion in renminbi is why it took so long to happen. It is true that this window will be used up very soon and RBI will be flooded with demands to raise the cap. From the pronouncements of the Indian authorities, it seems they will not be averse to raising the cap. The reason why a renminbi window is attractive for Indian companies is obvious. The companies need this window to raise loans in domestic currency from the Chinese market to finance their purchases of capital equipment, which is an approved end-use under the external commercial borrowing rules. This will eliminate one arm of the currency risk for these Indian companies. Currently, they have to source their loan from India or abroad in dollars, euros or Swiss francs, and then convert those into renminbi. There is, of course, the second leg of the conversion, too, where they bear the risk of currency fluctuation between the rupee and the renminbi, but that will continue.
The measure is also a recognition of the Chinese currency’s gradual positioning as a global reserve currency, for the time being. It will take time, notably depending on how well China integrates its closed domestic economy with the rest of the world. The signs are already there. In the London forex market, the size of the renminbi bonds is over $2 billion, from zero last year. To put it in perspective, however, the size of the London market is $200 billion. Nearer home, India’s neighbourhood is also gradually becoming comfortable with the use of the renminbi in their inter-country trade. But they are not as comfortable yet with the use of the rupee to settle their trade bills. That is, of course, a different question. Meanwhile, once India opens up the renminbi window, it will become necessary for RBI to keep a portion of its foreign exchange reserves in that currency, possibly at the cost of lower US dollar bonds.