India joins the US in pressuring China to revalue the renminbi
April 21, 2010

After keeping mum on its stance on the yuan revaluation, on Tuesday, India said that it would favor a stronger chinese currency which would ease balance of trade deficits.

Exports from China to India have grown faster than Indian shipments to its northern neighbor “and that obviously is a reflection of differences in the exchange-rate management,” Reserve Bank of India’s Duvvuri Subbarao told reporters in Mumbai yesterday. “If China revalues the yuan, it will have a positive impact on our external sector,” Subbarao added. “If some countries manage their exchange rate and keep them artificially low, the burden of adjustment falls on some countries that do not manage their exchange rate so actively,” Subbarao said, confirming that he would support the US in pressuring China to revalue the renminbi.

According to the Peterson Institute of International Economics, the renminbi or more colloquially the yuan is undervalued by 20-40 percent. Whether China bows to international pressure or domestically appreciates the yuan according to their own terms, the currency is not expected to rise more than 2-5 percent. Experts say that while this will have an insignificant impact on international trade, Chinese exports will become more expensive. For India, this means that Indian exports of textiles, leather products, marine products, engineering products and certain bulk chemicals will become more favorable in comparison.

US President Obama is keen to gain international support to revalue the yuan which has been pegged against the dollar at 6.83 since July 2008, after allowing it to rise 21 percent in the previous three years. Obama is expected to try hard to convince finance ministers from the G20 nations to put additional pressure on China to appreciate its currency. Finance ministers of the G20 countries are expected to meet in Washington on April 22nd for the three-day summit. India has agreed to support the US in pressurizing China to create a range within which the yuan can float.

Even as trade between India and China soars closer to the US$60 billion target, India’s trade deficit with China is increasing. In 2009, India suffered a trade deficit of US$15.8 billion against China, while in 2008 the trade deficit was 11.17 billion. With trade booming between the two nations, the trade deficit threatens to touch US$20 billion this year. In order to balance trade more evenly, India has also been asking China to open its markets further to Indian products and reduce non-tariff barriers, however marred by political in differences, the two nations are yet hesitant to open their markets fully to each other.

Do you agree that India will benefit if the yuan is revalued? Comment here!

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