Chinese Yuan vs. US Dollar intial posting

THE WEST MAY benefit most from the Chinese nudging their currency, the yuan, into a managed float regime. Imports by Western nations could get dearer while their exports rise, becoming comparatively cheaper. Over the last two years, Western business (read United States) interests have been badgering China to alter its fixed exchange rate regime to stem the export surge from China and other Asian nations. The US has been blaming China for its trade deficit and even the loss of some 2.5 million jobs; of course, a good part of the latter could be just political rhetoric.

The West is getting increasingly nervous about China and, for that matter, with developing countries such as India as they start to stand up for their interests in trade talks. An appreciating yuan or rupee is probably better than the West raising import duties that would distort trade flows. It suits China to shift to a managed float regime, with yuan linked to a basket of currencies within a trading band of 0.3 per cent, as its economy could do with cheaper imports of metals and crude oil. Does that make it better than the managed float of the rupee by the Reserve Bank of India with no officially-set band, as the market expects the yuan to appreciate in small doses? Any answer can only be in the realm of guess-work, as the closed economy offers the outside world processed and sanitised information. Most Asian currencies, including the rupee, have moved up against the dollar and observers are not sure of the toll on India-China trade or on investment by Indian businesses in China which has become something of a fad. The rising trade with China may soon enough see computer screens flashing a yuan-rupee rate, providing a definitive peep into the interest and inflation trends in the Middle Kingdom.

With dollar inflows holding firm, the RBI was finding it hard to keep the value of the rupee down against the dollar; now with the yuan's rise, it has one fewer reason to hold the rupee in check. Having long faced the criticism that it was deliberately keeping the rupee down against the dollar, the RBI and government banks need not zealously buy dollars in the forex market against rupees and then mop up the excess rupee funds under the Market Stabilisation Scheme (MSS) by floating government paper. Some think that the RBI will favour an orderly climb of the rupee against the dollar by, say, about five paise a day but not a pole-vault, with dollar touching Rs 43 in two months. But market players are not an orderly lot. The majority view is that the chances of the rupee turning weak has become a touch remote. A rising rupee could see exporters dump dollars spot, with importers holding open positions. Exporters, especially in textiles and Information Technology sectors, are bound to whine but will have to live with it. Crude and commodity imports will put less pressure on domestic prices to hold inflation in the 5-5.5 per cent band that the RBI has wished for. If all this happens, there is little reason for the RBI to dribble with interest rates during the quarterly review of its annual policy statement on July 26