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India is yet to recognise the soft power of making its rupee an international currency

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We must look North—and see the rise of the renminbi.

While China is actively pursuing a policy of Renminbi internationalisation, India appears to be on the path of de-internationalisation of the Indian rupee (INR). Of the two countries which had adopted the INR as legal tender, Nepal and Bhutan, one had to ban the use of notes above Rs 100 as legal tender. Considering the demand from people engaged in the trade and tourism links between the two countries, Nepal has now requested the Reserve Bank of India (RBI) to allow the use of higher denomination rupee notes in Nepal. The RBI should agree.

Eighty per cent of the world’s trade takes place in dollars. The dollar as the currency of trade, store of value and central bank reserves all over the world offers many advantages to the US. The US does not have to worry about current account deficits. It does not need to worry about foreign currency exposure, or the change in the exchange rate hitting trade and debt. The US even threatens to use its power from use of the dollar internationally to impose sanctions on countries such as Iran.

Countries like those in Europe, which have a lot of active trade in the region, saw the advantages of having a common currency with their trading partners and created the Euro. Since 2010, China has been actively trying to push for renminbi internationalisation. It encourages its trading partners to use its currency especially for denominating trade.

Also read: Nepal wants RBI to declare Rs 200, Rs 500 & Rs 2,000 currency notes as legal tender

China has made its currency part of the IMF’s Special Drawing Rights (SDR) basket. The renminbi has officially become a reserve currency. Even though capital controls of China are discouraging the use of its currency, the People’s Bank of China is still trying. The renminbi is being used for trade with Vietnam, Myanmar, Laos, Central Asian Republics and so on. It is aimed to become a major currency in the local region, in Asia and then globally.

India, on the other hand, is yet to recognise the soft power of making the INR an international currency. We were so worried about short-term objectives of a few more rupees coming back through the Nepal route that the RBI refused to exchange old rupee notes with Nepali businesses and households that were demonetised.

Yet, despite the sense of betrayal upon demonetisation and the loss of faith, thanks to the pressures of trade and tourism, businesses and households in Nepal are willing to use and hold rupees. We should welcome this. The use of the rupee would reduce foreign currency risk for Indian businesses and stabililise trade. Trade in rupees means reduced dependence on the dollar and foreign currency. In the past, India attempted rupee trade with the USSR. Today rupee trade arrangements are being made with Iran. There is some anecdotal evidence that the INR is accepted in Singapore, Malaysia, Indonesia, Hong Kong, Sri Lanka and the UK.

Historically, the INR has been used abroad. Until mid-1959, the rupee was accepted in Qatar, UAE, Kuwait, Oman and Malaysia. For a brief period until 1966, Gulf rupees were issued. These were not used in India, but only in the Gulf.

However, since the mid-sixties, as India turned inwards with high import duties, gold smuggling began and the arrangement was ended.

More recently, in addition to China, other countries such as Russia and Turkey are also considering local currency denominated trade. Such arrangements would allow them to trade with one another where US sanctions against them, or their trading partners such as Iran, adversely affect them.

China’s policy prompted policy makers in India to consider the possibility of internationalising the INR. The RBI commissioned two studies in 2010 (Internationalisation of Currency : The case of the Indian Rupee and Chinese Renminbi by Rajiv Ranjan and Anand Prakash) and 2011 (An internationalised rupee? by Shyamala Gopinath) to examine the issues surrounding the internationalisation of the rupee.

Both insights recommended a cautious approach towards currency internationalisation. They recommended that while the rupee is a natural contender for transitioning into a global currency, policymakers should start by increasing the role of the INR in its local region where the renminbi has taken a lead over it.

Also read: Rupiah will beat rupee in battle of high-yielders, Goldman says

The question policy makers in India should ask themselves is: Do they wish to make the rupee more acceptable globally? China has answered the question with a clear yes after the 2008 global financial crisis, which showed the fragility of a system dependent on the US.

If we say yes—we do want to make the rupee a global currency in the long run—we will also need to start locally with our neighbours.

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  1. The article lacks clarity as to what it means by “internationalising”.
    (1) It starts by saying 80% world trade takes place in US$ and eyes the benefits the US derives because $ is a “Reserved” currency.
    (2) The $ is not the Reserve currency because 80% of the world trade is in $, but 80% of world trade is in $ because it’s a reserve currency. Why did $ become the reserve currency? Historical reasons (post WW-II, US war economy machine turned into very serious consumerist economy machine; £ waned as British empire collapsed & Europe including Russia was severely battered; that made US engine of growth to world economy) & the fact that US continues to be the largest economy.
    (3) Not just trade dominance, $ benefits even from Capital A/c. What do the countries running trade surpluses with US do with the $ they earn? Park them again with Federal Reserve.
    (4) So what Does “internationalising” mean? Make ₹ Capital account convertible? No! That would be suicidal for a country that runs huge Current Account deficits?
    (5) Therefore, does “internationalising” mean denominating India’s trade with other countries in ₹? Fine, but just because China is doing it, can India do it? Does India have the HEFT of massive Trade Surplus? China runs trade surplus with almost all countries. If & when it offers to export it’s goods in Renminbi, the counter-parties are thrilled because they don’t need to dip into their dollar reserves. India doesn’t have that cushion. Who would want to sell to India in ₹ unless they buy as much or substantially from India (because only then they can avoid perils of ₹ depreciation)? So it can work only with neighbouring countries with whom we run trade surpluses and would remain restricted only to that (it wont be a start to “internationalising” ₹ as article postulates unless we start running trade & current account surplus overall)
    (5) Iran is an exception because her hand is forced due to US sanctions. And even this “Exception” is working because of US “benevolence” and is at the mercy of it’s continuation. That brings us to another point. Iran cannot trade even in Euro -another freely convertible currency acceptable the world over- or Swiss Francs (reputably currency of choice for illicit money/wealth parking) Canadian$ or Australian$. Why? Because US threatens these alternatives too with sanctions if respective countries/zones were to allow so.
    (7) Even the mechanism of International Payment settlement, S.W.I.F.T or SWIFT, which is based in Switzerland, and supposed to be Independent of the whims & fancies of any country, is vulnerable to the capricious US administration.

  2. It is not clear why there is reluctance to regionalize INR at least in SAARC and Gulf region. Further, is this a decision to be taken by RBI alone or it requires Government of India to approve this step. It always made sense to trade in INR given that it was used till 50s in our neighborhood, particularly in UAE, Kuwait and Oman. Imagine, by now we could have had a free trade agreement with INR as a major currency of trade with GCC and even MENA region.
    The author is right in saying that we have not recognized the soft power of INR trading and also allowed China to march over us on this aspect.

    It is also to be noted that all the wisest and bright governors of RBI in recent past and also their bright deputies have not given much thought on this issue, but could give unsolicited advise to the country on inclusiveness, liberal thoughts, cow slaughter etc.

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