Can Indian Rupee Be A Global and Reserve Currency?
RBI, in its circular dated 11/07/2022, has permitted international trade settlement in Indian Rupee and also permitted to invest“surplus balance” in Government securities by trading partner nations. This is a good beginning for converting the Rupee as “global and reserve currency”.But there is long way to succeed ina similar manner as, Euro, British Pound etc.
Past legacy of “falling Rupee” might not encourage other countries to accept the Rupee payment. The rupee is not fully convertible and there is no clarity on repatriation. But for friendly countries, like Russia, who are facing sanctions by the USA, bilateral trade in Rupee is a good option. By this, day today demand of the US dollar in both nationswill somewhat dilute.
However, for achieving the status of “global and reserve currency”, India needs a well-designed strategy along with some financial innovation, as done by USA in 1945. India has such latent potentiality subject to radical reforms. For this, let us peep in to history of global currency.
Earlier, the currency of one nation was accepted by other nations subject to conversion of “surplus balance” in to equivalent gold. After great depression in 1930s, USA central bank was holding the largest reserve of gold while as, the gold stock with other central banks was depleted; which caused a great hurdle in global trade.
Therefore in 1944,an agreement was entered among western countries, known as, the “Bretton Wood Agreement”. By this, US Dollar(USD) was accepted as a “global currency” for international trade and other transactions. In exchange of US Dollar, the price of gold was fixed at $35 per ounce. Thus, the dominance of the USD commenced in 1945.
In 1961, “gold pool” was formedat London for arresting any large fluctuation in gold price. However, inMarch 1968, the gold market was liberalized with a free floating price. After resetting exchange rate of USD with gold, the gold reserves in US banks started depleting. Finally in August 1971, the Bretton Woods agreementwas collapsed.
By that time, USA had already gained it’s supremacy on the economic and strategic fronts such as defence, space and innovation. Its economy size was also the largest. Hence, the dominance of US dollar prevailed. This was indeed a master strategy of the USA for establishing its dominance in the world economy.
Subsequently, the USAcompelled major oil-producing Nations to trade oil in USD. The oil, being a“new gold” of the modern economy, provided huge strength to the US dollar. This was another master strategy of the USA which provided strength to the US dollar.
Lately, international trade and settlement started in other currencies such as Euro, British pound, Japanese Yen, Germany Mark, Swiss franc, China RMB etc. Currently, about 80-90% of trade transactions are in USD and about 60-65% of forex reserves are held by various Nations in USD only. Such a financial strategy has certainly given a long-term advantage to the USA.
Currently, USD is gaining strength despite “high inflation” at the USA which is contrary to the established norms. Likewise, in2007-08, the origin of the global crisis was at the USA but the entire world defended the value of US dollar for protecting the value of the forex reserve held by all nations in USD.
In about 2009, China and Russia attempted to develop a new “reserve currency”. In 2016, with an increased volume of international trade, the Chinese RMB became one of the world's reserve currencies. As per IMF, on December 2019, the central banks of the world held $217 billion worth of RMB; that is a fraction of $6.7 trillion reserves held in US dollars.
However, China might not succeed in a great manner since; it is not a democratic Nation and it doesn’t enjoy equitable global trust due to non-transparency in the economic data and its policy for territory expansion. However, by virtue of its economic power, the RMB might dominate next to USD in future years.
India, being a democratic Nation, enjoys the global trust and that must be preserved. India is also holding the largest stock of “private gold”; which should be leveraged in an innovative manner, as suggested by Author in his book, Turn Around India-2020.
India has a hidden and vast growth potential which must be unlocked. India has a large workforce with superior DNA; that must be engaged gainfully in productive activities. India must improve “global competitiveness” and keep inflation under control through “structural reforms”. India must be converted as a “Trade Surplus” and“Investment friendly” Nation; that is a key to success.
With aforesaid achievements, Indian Rupee can be certainly accepted as a “global and reserve currency”. India must change its mindset which is somewhat tilted in favour of a“weak Rupee” for promoting exports. India must surmount past legacy and unlock its latent potential through radical reforms, financial innovations and a well-designed long-term strategic plan.
R.P. Gupta, Author: Book, Turn Around India-2020
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