Rupee-denominated trade to combat uncertainties of dollar

A fluctuating dollar following a downgrade of US credit rating by Standard & Poor’s has prompted exporters, especially those selling high-value engineering products or construction services to Africa, Central Asia and Latin America to seek rupee-denominated trade. In fact, the Chinese government is currently pursuing this strategy. A member of the Engineering Export Promotion Council (EEPC) told Deccan Herald, “Dollar and euro fluctuations are affecting exporters. The kind of uncertainty seen these days and erosion in realisations, no amount of foreign exchange hedging helps.”

The dollar’s value is expected to fall against currencies such as the rupee and the Chinese currency renminbi after the US rating rap. The renminbi has appreciated 0.72 per cent to an all-time high in just four days after S&P cut the US debt rating from “AAA” to “AA+”.

Fear is that central banks across the world will now look for ways to reduce their dollar holdings. They can’t do so overnight or even in the course of a year as the only competing currency, euro, is also going through troubled times because of the near bankruptcy in many euro zone countries.

Forex traders here expect the rupee to rise to Rs 40 from Rs 45 now to the dollar by the middle of next year. “Such an appreciation  in value against dollar will mean an exports from India will contract, say cars to Kenya at $10,000 a piece taking the dollar value at Rs 45, could get 12.5 per cent less in rupee terms,” said an expert. Over 35-40 per cent of India’s exports are with the developing world, while 65-70 per cent are with the US, Europe, Japan and West Asia. However, the 82 per cent jump in exports in June came mainly from the non-dollar, non-euro countries.

CII national committee on exports chairman Sanjay Budhia said, “Rupee denominated trade will take out the uncertainty in realisations.” Exporters want India’s Exim Bank to give rupee debt to developing countries against which they can export profitably, just as China’s banks are extending renminbi-denominated loans to Indian electricity generating companies to buy Chinese equipment.

However, former FIEO president A Sakthivel said, “Rupee trade does not help us much as most of our trade is with US and Europe. If we try to go for bilateral currency trade, accepting payment in local currencies of South America, Africa will be a problem.”Some economists also favour rupee trading in the present situation. For instance, Crisil’s Chief Economist D K Joshi said, “The Chinese are doing trade deals in renminbi with many countries and we should do the same.”