INDIA MULLS YUAN TRADE SETTLEMENT
Allowing direct convertibility may help traders cut transaction, hedging costs
INDIA is considering allowing some imports from China to be settled in yuan, said people familiar with the proposal, as the South Asian nation moves to limit its currency’s loss against the US dollar.
The plan would enable direct convertibility between the rupee and yuan and help cut transaction and hedging costs, said the people. The proposal would allow Indian exports of pharmaceuticals, oilseeds and sugar to China to be settled in rupee, while keeping out trade in high volume products such as electronics.
India-China trade is mainly settled in US dollars since currencies between the two nations aren’t directly convertible.
By allowing Indian importers to pay for Chinese goods in yuan, the South Asian nation would be able to save on US dollars to pay for escalating oil import costs in the face of higher crude prices and the rupee’s slump to a record low.
Oil is India’s biggest import item and the government estimates it will pay a record US$125 billion (RM522.5 billion), or 8.8 trillion rupees, for crude imports this fiscal year, the highest in rupee terms since 2001.
A small but viable and ringfenced basket of commodities is being considered for rupee-yuan trade. Allowing direct convertibility could help cut currency risks for Indian traders, said the person.
Limiting the basket to a few items will help Prime Minister Narendra Modi’s government keep India’s US$56 billion trade deficit with China in check.
The current-account deficit is already at the highest level in five years, with the government raising tariffs on imports of items ranging from air-conditioners to communication gear to curb the shortfall and stabilise the rupee.
For China, the move would help broaden the yuan’s influence and improve liquidity overseas. The option of invoicing half of trade between the BRICS nations — Brazil, Russia, India, China and South Africa — in yuan had already been discussed by the group.
Bank of China Ltd started a yuan clearing and settlement service in Pakistan in May, and similar yuan hubs have been set up in Russia and Canada to allow traders to settle transactions. A similar system could be considered in India, said the people.