Opaque currency regime may restrict rupee-renminbi trade mechanism

The government’s plans on having a rupee-renminbi trading arrangement with Beijing, bypassing the dollar, may be difficult to achieve.

While traders will benefit from lower transaction costs, there are pitfalls of doing trade in a currency that is not free-floating. China continues to change the value of the renminbi to suit its monetary and foreign policy interests.

The plan was suggested on Thursday during an inter-ministerial meeting chaired by Commerce and Industry Minister Suresh Prabhu on increasing domestic production and export capabilities across sectors.   "Back in 2009-10, China was offering up to 15 per cent concession if countries used their currency. But an uncertain currency regime stopped countries from doing so," said Federation of Indian Export Organisations (Fieo) Director-General Ajay Sahai. However, the move will be beneficial for Indian traders, who will save on the large cost of hedging their transactions. 

“Hedging costs, whereby importers and exporters have to pay for converting their transactions into US dollars and vice versa, stand at 4-5 per cent of the total costs,” Sahai added.