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Wednesday, 28 December 2011 06:30
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Let's learn from the Japan-China currency deal


While the $10-billion currency swap line India has signed with Japan will be formalised during the ongoing visit of Japanese Prime Minister Yoshihiko Noda, India would do well to learn from the agreement Japan reached with China three days ago. Both countries agreed to promote direct trading without using dollars—given that the settlement rate between the two currencies will be negotiated directly, this will also eliminate the issue of the yuan being under-valued. The eventual plan is to encourage both countries to invest in each other’s bond markets as well. Over a period of time, more such arrangements will ensure the yuan moves to becoming an international currency, in keeping with China’s increasing economic power.

As has been argued in the context of the rapidly weakening rupee, by this newspaper as well as others, India needs to move as much as possible of its trade off the dollar, and agreements like the Japan-China one will help achieve this. Indeed, India needs to look at more such arrangements with other trading partners as well. The movement away from the dollar can only be a slow one, but the sooner India becomes a part of this, the better. A swap line of the type being signed with Japan will help RBI get some more flexibility—if anything, the line is too small—in case there is pressure on the rupee, but the larger direct trading arrangement is likely to offer a more permanent solution.



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