RUPEE AND THE RENMINBI

THE FALL OF RUPEE:

The rupee has depreciated by more than 24 percent since May 2011, moreover with the rupee breaching the 55 dollar mark, profit margins of companies that import commodities or components would come under severe pressure, which could result in price increases for the consumer.The rupee depreciation will particularly hit the industrial sector and put higher pressure on their costs as items like oil, imported coal, metals and minerals, imported industrial intermediate products all are getting affected.Although the prices of most of the imported commodities have fallen, the depreciating rupee has meant that the importer gets no respite as they need to pay more to purchase the same quantity of raw materials.The depreciating rupee would keep the price of imported commodities elevated. Thus the industrial sector is bound to get adversely hit.

A depreciation of the local currency results in higher import costs for the country.Failure of a similar rise being experienced in the prices of exportable commodities is going to result in a widening of current account deficit of the country Increase in import prices of essential commodities such as crude oil, fertilizer, pulses,edible oils, coal and other industrial raw materials are bound to increase the prices of the final goods. Thereby making it costlier for the consumers and hence inflation might be pushed up further.The central government fiscal burden might increase as the hike in the prices of imported crude oil and fertilizer might warrant for a higher subsidy provision to be made for these commodities.Interest rate differentials in domestic and global markets encourage the industry to raise money through foreign markets however a fall in the rupee value would negate the benefits of doing so.

THE RISE OF YUAN:

Chinese yuan is a favourite  target of western politicians and policy makers,who accuse Beijing of holding down the currency's value artificially to prop up china's exports sector,allowing manufacturers there to steal more jobs from these politicians constituencies.The slow rise of yuan recently against dollar is often cast as chines tacit capitulation to these pressure from abroad.      let’s see how tactically china plays with its currency.

China has a huge Forex reserves of 3.3 trillion almost 11 times that of india and has a huge surplus current account surplus($300 billion,equal to india’s entire Forex reserves).US last  year to recover from the economic slump has gone for quantitative easing. This will bring more dollar supply in to the market, boosts its exports. The devaluation of us dollar would have an impact on yuan. First it would expose Chinese foreign securities it holds. Secondly its foreign securities will lose purchasing value in European and world market. To contain these effects china has to reduce its Forex reserves, which it can’t do. So, allowed its currency to appreciate, it would definitely increase its imports but Chinese import basket is as such it would boost up its manufacturing industry, moreover a strong yuan would curtail domestic inflation. A ploy employed against China by the west,used it to its advantage.