International Economics

India’s Mistaken Call for Renminbi Appreciation

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By Jagdish Bhagwati | 05 June 2010


India’s central bank governor issued in late April a critique of the alleged Chinese undervaluation of the yuan/renminbi, siding therefore with the U.S. politicians and some think-tanks (chiefly Fred Bergsten and Arvind Subramanian of the Peterson Institute for International Economics) against China. I and Arvind Panagariya at Columbia published a critique of this decision in the Times of India, India’s leading daily. While that op-ed lays out our arguments fully, and we consider the central banker’s pronouncement a mistake, here I state the flaws in the central banker’s position and argue why his mistake must be corrected.



The underlying argument is based on a syllogism. The first argument is that an undervalued renminbi is the root cause of the Chinese current account surpluses and the United States current account deficits. The second argument is that the export expansion so achieved by China robs countries such as Brazil and India of their export markets.


But neither argument is acceptable. Consider first the error in the second argument. Just because China fixes its exchange rate against the U.S. dollar does not mean that India cannot choose the value of its currency against the dollar or other currencies including the renminbi at the level it sees appropriate for itself. What happens to India’s exports and imports depends on what it does to its own exchange rate, money supply and fiscal deficits and how its savings and investment are balanced.



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