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.
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.
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.