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Dollar-Yuan Battle: INDIA NEEDS TO WIN , by Shivaji Sarkar, 9 Sept, 2010 Print E-mail

Economic Highlights

New Delhi, 9 September 2010

Dollar-Yuan Battle


 INDIA NEEDS TO WIN

 

By Shivaji Sarkar

 

A war is raging in the world economic arena. The US is not only fighting a war in Iraq and Afghanistan, it has also engulfed its dollar. The BRIC countries are worried about it and so are others. But so far the dollar continues the fight.

 

As the dollar and yen continue soaring high, other currencies are facing a huge depletion in their fund value. This vulnerable situation is seen as a loosely handled economic affair which has been affecting the world economy in a destructive manner. The dollar, despite a crisis in the US economy, has emerged as the sole winner amongst all major currencies including the Indian rupee. This global financial crisis has left corporate heads, investors, share holders and many other business entities completely stunned.

 

The US has launched a sharp attack on China demanding it up-value the yuan. A U.S. Treasury report almost labelled Beijing a “currency manipulator” and threatening a deepening rift between the world's biggest and third-biggest economies. Washington’s concern is legitimate. Its market is providing a value for all Chinese products affecting its own products. The US views itself as subsidising the Chinese economy.

 

Japan is facing an upsurge in its yen. Direct currency intervention, though not yet tried, looks likely. Yet the yen’s trade-weighted exchange rate, corrected for differences in inflation, remains about 6% below the average of the last 20 years. True, the yen did hit a 15-year peak of 85 against the dollar this week and remains far stronger than its 20-year average of around 100. But the comparison with the trade-weighted figure underlines the extent to which it reflects the dollar’s overall weakness.

 

Brazil is concerned about the US bid to keep the dollar at a lower value.  It avers that the problem is not a strong yuan but a weak dollar. Brazil’s Finance Minister Guido Mantega said he was “very worried” about a plan by rich countries to boost their exports via weaker currencies, which could lead to unsustainable current account deficits in emerging economies.

 

“They want to re-balance their economies at our expense. That is not possible and we will not accept that game,” Mantega told reporters in New York after a presentation to investors organized by the Brazilian-American Chamber of Commerce. “The main problem is the dollar. A weak dollar feeds the carry trade. People come to the US to borrow cheap money to invest in Australia or other higher-yielding countries,” he added.

 

India is in a quandary. It does not know whether to opt for a weak or strong dollar even as the rupee continues its downward journey. A stronger rupee is not in the interest of its exports and a weaker rupee means higher out-go for imports. Despite being a part of BRIC, it does not share the views of Brazil about the yuan. In New Delhi’s view the yuan must be up-valued as cheap Chinese imports are severely affecting its industry.

 

Brazil’s outburst against neighbour US should be viewed with concern. So also India’s disquiet about China, perhaps a bit more.  When it comes to the yuan, New Delhi should tow Washington’s line of action not only for economic reasons but also for strategic concerns. A stronger yuan would act as bait against some close but unfriendly neighbours as their investment cost would go up. But India is shy of taking a diplomatic offensive against China as the US is doing.

 

Possibly New Delhi need not try to strengthen its rupee till Washington can force Beijing to up-value the yuan. India’s interests are not the same as the US. Though in the long run a weak rupee has wider ramification, till such time that China re-values its currency, India should keep quiet. New Delhi has to pressurise both Washington and Beijing to set a higher price for the yuan. It is necessary to stop dumping by China in India through official and unofficial routes. Cheap Chinese imports are the greatest threat to India’s economy, thus for sometime it can allow the dollar to suffer as part of its short-term economic strategy.

 

This calls for subtle political and diplomatic action. India should aim at creating a conducive atmosphere for its economy to outshine that of China’s. It should also use BRIC for this purpose. Russia would support India as presently its currency too is closely pegged to the dollar, notwithstanding close association with the Shanghai Cooperation Group.

 

Clearly, New Delhi needs to achieve this fast as a falling rupee is not in its long-term economic interest. A lower rupee rate fuels inflation as India has to import petroleum products at a higher price. Its capital goods import also becomes expensive which hits infrastructure and other development projects. Besides, its foreign exchange value keeps changing, often falling, adding to problems in the international market.

 

There are other tribulations of a falling rupee. As it falls, foreign investors would want bigger returns for their money to compensate for the higher risk. This means that the Indian Government, companies and individuals would have to pay more for the money they borrow, plainly, higher interests.

 

A major problem with a falling rupee is that it would increase the burden on the Government of repaying and servicing foreign debt. This would increase the fiscal deficit. Another concern is that it might discourage foreign institutional (FII) investment from pouring funds into the Indian markets. There is also risk to Indian companies. A weak rupee may add to woes as their overseas borrowings at cheaper rates to finance import and exports might be adversely hit.

 

Undoubtedly, the war against the dollar would continue till either the US economy regains health or loses it completely. Till such time the dollar would remain in a flux. A likely scenario.  Even the Euro is fighting the dollar. The US is in high debt but manages its affairs politically and by flooding the market by printing dollars despite a low, virtually no reserve. Signalling danger for international markets.

 

Indeed, remaining pegged to the dollar for long might be detrimental. India needs to hedge against it by boosting the rupee. It is its insurance for the future. New Delhi has to win the battle against the dollar and keep the yuan further up-valued to sustain its growth. ---- INFA

 

(Copyright, India News and Feature Alliance)

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