(Bloomberg) -- India is considering allowing some imports from China to be settled in yuan, people familiar with the proposal said, as the South Asian nation moves to limit its currency’s loss against the dollar.
The plan would enable direct convertibility between the rupee and yuan and will help cut transaction and hedging costs, the people said, asking not to be identified citing rules. The proposal would allow Indian exports of pharmaceuticals, oilseeds and sugar to China to be settled in rupee, while keeping out trade in high volume products such as electronics, they said.
India-China trade is mainly settled in U.S. dollars since currencies between the two nations aren’t directly convertible. By allowing Indian importers to pay for Chinese goods in yuan, the South Asian nation would be able to save on dollars to pay for escalating oil import costs in the face of higher crude prices and the rupee’s slump to a record low.
Oil is India’s biggest import item and the government estimates it will pay a record $125 billion, or 8.8 trillion rupees, for crude imports this fiscal year, the highest in rupee terms since 2001.
Currency Risks
A small but viable and ring-fenced basket of commodities is being considered for rupee-yuan trade, according to the person. Allowing direct convertibility can help cut currency risks for Indian traders, the person said.
India’s Commerce ministry spokeswoman didn’t immediately respond to two phone calls to her mobile phone. China’s Ministry of Commerce and the central bank didn’t immediately respond to separates faxes seeking comments.
Limiting the basket to a few items will help Prime Minister Narendra Modi’s government keep India’s $56 billion trade deficit with China in check. The current-account deficit is already at the highest level in five years, with the government raising tariffs on imports of items ranging from air-conditioners to communication gear in a bid to curb the shortfall and stabilize the rupee.
For China, the move would help broaden the yuan’s influence and improve liquidity overseas. The option of invoicing half of trade between the so-called BRICS nations -- Brazil, Russia, India, China and South Africa -- in yuan had already been discussed by the group.
Bank of China Ltd. started a yuan clearing and settlement service in Pakistan in May, and similar yuan hubs have been set up in Russia and Canada to allow traders to settle transactions. A similar system could be considered in India, the people said.
Earlier discussions about trading in local currencies had made little progress with Indian banks expressing apprehension about U.S. regulations and with 80 percent of the nation’s trade valued in dollars.
China has been seeking to expand bilateral trade with India amid an intensifying trade conflict with the U.S. However, Indian policy makers are worried manufacturers may not be able to cope if Chinese imports rise dramatically with the currency plan, the people said.