Dollar or Yuan? Indian MSMEs Weigh Currency Shifts as Rupee Weakens

• Rupee depreciation raising cost of Chinese imports.

• MSMEs largely continue trading in US dollars.

• Experts see localisation as stronger long-term solution.

• Yuan adoption concentrated among large corporates.

• Economists warn against new currency dependence.

As the Indian rupee weakens against the US dollar, the cost of imports—particularly from China—has risen sharply, prompting some Indian companies to explore settling trade in Chinese yuan. However, industry leaders and economists say the shift remains limited, especially among micro, small and medium enterprises (MSMEs), which continue to rely predominantly on dollar-based trade mechanisms.

The debate comes at a time when Indian manufacturers are grappling with rising input costs and currency volatility, both of which are squeezing margins across sectors.

Currency Pressure Hits Import-Dependent Industries

For companies dependent on imported raw materials and components, rupee depreciation presents a complex equation. While exports appear more competitive on paper, the advantage often gets offset by higher costs of imported inputs.

Ankit Patidar, Director and CMO at Shakti Pumps, explains that currency movements create simultaneous stress across pricing, procurement and working capital cycles. Components such as electronic parts, magnets, semiconductors, copper and aluminium have all become more expensive as the rupee has weakened.

“The challenge is less about a single commodity and more about margin visibility,” he notes, pointing out that sharp currency swings undermine predictability.

A similar situation is unfolding in other industries. Ankit Agrawal, Director and Managing Partner at Mysore Deep Perfumery House, says import costs have climbed significantly regardless of whether payments are made in dollars or yuan. Meanwhile, export gains have not fully materialised due to subdued global demand.

Yuan Settlements: A Limited Shift

Although discussions around yuan-denominated trade have gained visibility, adoption remains concentrated among larger corporations.

Patidar argues that multinational and mid-sized firms with dedicated treasury teams and established banking relationships are better positioned to manage multi-currency exposure. Smaller enterprises, by contrast, prefer the familiarity and liquidity of dollar-based systems.

Aayaan Bery, Sales and Global Marketing Director at Noida-based exporter KSP Inc., echoes this sentiment. His company continues to transact primarily in US dollars, citing comfort with existing banking infrastructure and established forex systems.

Industry representatives suggest that broader yuan adoption would require banks and financial institutions to simplify currency management tools for MSMEs. Multi-currency exposure demands expertise in hedging, documentation and risk control—areas where many smaller firms lack institutional support.

Hedging Realities and Basis Risk

Deep Mukherjee, Partner and Director for Risk Management and Data Science at Boston Consulting Group (BCG), cautions that switching settlement currency does not automatically reduce risk.

Companies must distinguish between the currency used for trade settlement and the currency used for hedging exposure. If liabilities are denominated in yuan, hedging in yuan can reduce “basis risk”—the mismatch between the hedged currency and the underlying exposure. However, assuming the yuan will consistently mirror the dollar’s movement could expose businesses to unexpected volatility.

He notes that while the yuan and dollar have historically moved closely due to China’s managed exchange rate regime, policy recalibrations by Chinese authorities can create sudden shifts.

A Broader Multi-Currency Landscape

Economists view the rising interest in yuan settlements as part of a wider transition in global trade. Rumki Majumdar, Economist at Deloitte India, says the world is gradually moving toward a multi-currency system where the dominance of the US dollar may be less absolute.

Such a framework could allow India to settle trade in partner currencies, potentially reducing vulnerability to dollar shocks and sanctions-related risks. As India signs more free trade agreements and integrates further into global supply chains, diversified currency arrangements may gain relevance.

However, she also highlights risks. Hedging markets for currencies other than the dollar are less developed, increasing complexity. A diversified reserve basket would require more active exchange-rate management and careful policy calibration.

Localisation Over Currency Experimentation

Despite currency discussions, many industry leaders believe the real solution lies elsewhere.

Patidar argues that yuan settlement merely addresses one layer of exposure when dealing with Chinese suppliers. The fundamental vulnerability, he says, is import dependence itself. “If critical components continue to be imported, currency denomination becomes secondary,” he suggests.

Ajay Garg, Managing Director of E3 Group, describes yuan settlements as a tactical measure rather than a structural solution. His company has focused on expanding domestic production capabilities to replace imports wherever feasible.

Similarly, Mysore Deep Perfumery House and KSP Inc. report increased efforts toward local sourcing and vendor diversification. However, certain specialised materials and natural resources remain difficult to substitute domestically, meaning China continues to play a substantial role in supply chains.

Strategic Concerns and Trade Imbalance

Beyond commercial calculations, economists warn of potential strategic consequences.

Nisha Taneja, Senior Visiting Professor at ICRIER, notes that while yuan settlements may appear cost-effective in the short term, India’s significant trade deficit with China presents challenges. Sustained yuan settlements require a balance between earning and spending the currency.

Countries such as Russia have become heavily dependent on yuan settlements due to geopolitical constraints, limiting financial flexibility. By contrast, some ASEAN economies sustain yuan trade because they generate substantial export revenues from China.

For India, where imports from China far exceed exports, expanding outbound trade would be necessary to maintain equilibrium under a yuan settlement framework.

Strengthening the Rupee Through Reform

Industry bodies argue that long-term currency stability depends on strengthening domestic fundamentals. Rajeev Singh, Director General of the Indian Chamber of Commerce (ICC), points to recent RBI measures aimed at attracting foreign capital—such as removing withholding and capital gains taxes on government securities—as supportive of the rupee.

He emphasises that deeper reforms, including policy support for manufacturing, export financing assistance and improved access to overseas markets for MSMEs, will ultimately reduce vulnerability to external shocks.

Diversification Without New Dependence

BCG’s Mukherjee concludes that diversification is prudent—but it should extend across multiple currencies rather than replace one dependency with another.

For most MSMEs, the immediate focus remains on supply-chain resilience, operational efficiency and localisation rather than currency experimentation. While yuan settlements may expand gradually, the dollar continues to anchor India’s trade ecosystem.

In the evolving global currency order, Indian businesses appear to be choosing structural adaptation over short-term currency shifts—prioritising production strength and diversified sourcing over a simple change in invoicing denomination.