Internationalisation of the Indian Rupee!

KAKALI DAS

The central bank faces a daunting task, with immense pressure but little recognition. Take India’s Reserve Bank, for example. The RBI meticulously oversees various aspects: safeguarding the Indian rupee from fluctuations, combating inflation, maintaining stable interest rates, and ensuring the integrity of commercial banks.

Prime Minister Narendra Modi has now bestowed upon the RBI a new, arguably more challenging objective. During the RBI foundation day, the PM said, “Our goal should be to make the Indian rupee more accessible and more acceptable across the world.”

The government’s message is clear: Globalize the Rupee. But what exactly does that entail?

A global currency serves as a reserve currency, widely utilized in international trade and held by numerous central banks. It boasts easy convertibility, facilitating seamless buying and selling transactions.

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There are only a few such currencies. The US Dollar dominates, constituting 60% of all foreign exchange reserves and facilitating 40 to 50% of global trade. Other examples include the Euro and the Pound Sterling. However, many countries are now de-dollarizing, seeking to reduce reliance on the US dollar. China aims to globalize its Yuan, while BRICS nations discuss the possibility of using their own currencies. India, too, seeks to globalize the Rupee.

One reason for the sudden push is financial. Numerous countries face challenges with foreign reserves, relying heavily on dollars for loan repayments and trade. This reliance has led to shortages of dollars, as seen in Sri Lanka’s situation in 2022. Consequently, these nations are exploring alternatives, such as conducting trade in their local currencies.

The second reason is political. Several major exporters, including Russia, China, and Iran, face Western sanctions, rendering the use of dollars for transactions with them impractical.

Countries seek alternatives to the US dollar by turning to local currencies. India’s motives are a blend of political and economic factors. With significant trade ties to nations like Sri Lanka and Bangladesh, which have limited dollar reserves, and engagements with sanctioned countries like Russia and Iran, India requires alternatives to the US dollar.

In addition, there’s a strategic objective at play. As the world’s fifth-largest economy with aspirations to rise to the third position within this decade, India is positioning itself as a global power. Relying on foreign currencies becomes less tenable in this context. A globalized Indian rupee would offer greater stability, shielding the economy from foreign volatility and economic warfare.

Having addressed the what and why, let’s delve into the how: How can India go about globalizing the rupee?

It’s important to manage expectations as globalizing a currency is a gradual process. Take the example of China, which began efforts to internationalize the Yuan after the 2008 recession. Despite nearly 16 years of effort, the Yuan accounts for only 5.8% of international payments, trailing behind the dollar, euro, and pound. Similarly, progress with the rupee shouldn’t be anticipated as an overnight phenomenon.

What steps can India take in this regard?

It’s important to note that there’s no one-size-fits-all approach to currency globalization. Each currency has taken a unique path. The Pound used colonization, the Dollar leveraged the Second World War, and the Euro relied on institutions.

When a country aims to globalize its currency, economists often highlight four key requisites or steps that need to be taken.

The first prerequisite is financial stability. This entails keeping overall debt in check, maintaining moderate inflation rates, and achieving a high per capita income. Various RBI committees have emphasized this, advocating for a fiscal deficit of less than 3.5% of GDP and inflation below 5%. These thresholds must be sustained over a prolonged period to demonstrate stability. However, India currently falls short, with a fiscal deficit of 5.8% of GDP, indicating the need for corrective measures before progressing further.

The second and third requisites are interconnected. The rationale is straightforward: there must be a larger base of individuals buying and holding the rupee, but they need compelling reasons to do so. This could involve India exporting a significant volume of goods, facilitating the use of the rupee for purchasing these exports, or alternatively, the rupee must represent an attractive investment opportunity.

Let’s focus on exports first. India currently accounts for only 2% of global exports, whereas the US comprises 8.5% and China nearly 15%. It’s imperative for India to boost its export share; otherwise, other nations may not have a compelling reason to adopt the rupee. For instance, Russia recently terminated the Rupee-Ruble trade system due to being burdened with millions of unusable rupees, underscoring the importance of enhancing India’s export capacity. This brings us to the investment aspect

Let’s rewind to 2010. If you had $1 back then, it was worth 45 Indian rupees. Fast forward almost 14 years, and today that same $1 is worth almost 83 Indian rupees. This demonstrates that while the dollar has appreciated in value, the rupee has not, indicating that it hasn’t been a lucrative investment. Thus, it’s crucial to ramp up exports and enhance the attractiveness of the rupee.

Now, onto the fourth requisite: removing state controls. While foreign funds can be injected into Indian markets without restriction, the reverse is not permitted. There are limitations on the movement of rupees outside India, known as Capital Controls. Investors typically view these controls unfavourably, as they raise concerns about the possibility of funds becoming trapped in India or the depreciation of the currency. Consequently, investors prefer currencies that can flow freely.

Similarly, the value of the Rupee is frequently supported by the Reserve Bank of India. If it depreciates sharply, the RBI intervenes by selling dollars in the market to bolster the Rupee. However, investors typically disfavour this approach, preferring a robust, freely floating currency. Despite the considerable challenge ahead, the encouraging news is that India is fully committed to addressing it.

In 2022, the RBI made a significant announcement regarding international trade settlements in rupees. This initiative enabled traders to conduct buying and selling transactions using rupees, and as a result, numerous countries now accept the Indian currency for trade. Countries such as Bhutan, Nepal, the UAE, Sri Lanka, Bangladesh, and even Iran have embraced the use of Indian rupees in their trade transactions.

Furthermore, India’s exports are steadily on the rise. In 2020, India’s total exports amounted to $500 billion, which surged to $770 billion in 2022. Projections indicated that they were anticipated to reach $900 billion in the last fiscal year, although official data is still pending.

In summary, there’s a strategic imperative to globalize the rupee, accompanied by political determination, while the attainment of financial requisites is gradually underway. This endeavour is akin to a marathon, where steadfast focus remains paramount.

07-04-2024

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