Globalizing the INR

Central banks have a thankless job, a lot of pressure but not a lot of credit. Just consider the Central Bank of India, RBI or the Reserve Bank of India, consider everything they do. They protect the Indian rupee from volatility, they defend the Indians from inflation, and they keep our interest rate in checks, none of it is easy.

But, just a few days ago, our Prime Minister, Shri Narendra Modi has given the RBI a new task, an arguably tougher one. At the RBI's foundation day (1st April, 2023), by stating that we should try to make the INR make worldwide accessible as well as acceptable.

https://youtu.be/bVu7qXo4U3Y?si=NavsEzTnUNn3SHDf&t= (link of the video from 26:55 to 27:05).

Globalize the Rupee, that's the message from the government. But what does it mean? A global currency is a reserve currency, it is a used in global trade, it is held by most central banks and it is easily convertible. You can buy and sell this currency easily, and how many such currencies are there? Not many.

US Dollar is the biggest one, it makes up 60% of all Forex Reserves plus about 40 - 50% of the global trade. Other examples are the Euro and the Pound Sterling. But nowadays a lot of country are de-dollarizing, they're moving away from the US Dollar. China wants to globalize its Yuan, BRICS is talking about its own currency and now India wants to globalize the rupee. But you may be wondering why the sudden rush??

Why DeDollarization?

• Well one reason is financial, many countries are struggling with Forex Reserves, they use dollars to repay loans and to trade as a result they're running out of dollars, like Sri Lanka did it in 2022. So these countries are looking at other options like trading in local currencies.
• The Second reason is political, some major exporters are under western sanctions, countries like Russia, China even Iran they're all sanctioned. So you cannot use dollars to buy from them.

So, what do countries do? They look beyond the USD, they try to use local currencies and India's reasons are a mixture of both of these, political and economic.

We trade a lot with countries like Sri Lanka and Bangladesh, Countries that are low on Dollar Reserves. We also trade with the sanctioned countries like Russia and Iran. So, we need alternative to the USD.

But beyond this there is also a third reason, a strategic goal. India is the 5th largest economy in the world, it aims to become 3rd largest by the end of this decade. So, we are talking about a global power, which means you cannot depend on the foreign currencies, you need something more reliable, like a globalized Indian Rupee. It would protect you from foreign volatility, insulate you against economic warfare.

So, We have answered the What and why, now let's look at how.

How Can India Globalize the INR?

It won't happen overnight. Just look at the Chinese. After the 2008 recession, they decided to globalize their currency, the Yuan, it's been almost 16 years now. Yet the Yuan makes only 5.8% of International Payments, it's still behind the dollar the Euro and the pound so do not expect the miracles with the rupee.

Different Currencies had different paths for globalization, the Pound used Colonization, the USD used World Warr II and the Euro used institutions.

But if a country wants to globalize its currency most economists talk about four requisites.

1. Financial Stability:

a) By this it means, the overall debt should be under control, the inflation should be moderate, and the per capita income should be high, various RBI committees have talked about this, they say Fiscal Deficit should be < 3.5% of the GDP and the inflation should be < 5%. And these levels should be maintained over a long period of time, and then you signal a stability.

b) And I'm afraid India is not there yet, India's Fiscal Deficit is 5.8% of the GDP, so we need to fix it first, that is the first requirement. The second and third requirement is linked. The logic is very simple, you need more people to buy and hold the rupee, but they should have a reason to do that

2. Exports:

a) Either India should export a lot of goods, in which case you can use the rupee to buy those goods or buy these exports or it must be great investment.

b) Let's look at the Exports first - India makes up just 2% of the global exports, whereas the US and China makes 8.5% and 15% resp. So, India's share needs to be increased. If not, then other countries may not want rupee.

c) Just look at Russia, they decided to call off the rupee-rubel trade system. Why? Because Moscow was stuck with billions of unusable rupees. Which brings us to the investment angle.

3. Investment Value:

a) Let's go back to year 2010, back then 1$ = INR 45, almost 14 years have passed, today that 1$ = INR 83. So, the dollar has appreciated in value, but the rupee has not, meaning the rupee has not been a great investment.

b) So, you need to expand your exports and make the rupee desirable.

4. State Controls:

Finally, let's look at the last requisite, that is removing the state controls.

a) You can pump endless foreign money into Indian Markets, but the opposite is not allowed, you cannot take unlimited amounts of rupee outside India. There are limits on this movement. These limits are called Capital Controls, Investors do not like this thing. What if their funds get stuck in India? What if the value keeps falling? So, investors like currencies that flow freely.

b) Same with Currency Value. The Rupee is often defended by the RBI, if it falls too steeply, the RBI intervenes. They Sell dollars in the market to bounce back the rupee. Again, investors do not like this.

c) Investors prefer a robust free-floating currency.

Conclusion:

So, Challenges ahead are huge. But the good news is, India is quite serious about it. In 2022, RBI announced a big move, it allowed international trade settlements in rupees and many countries now accept the Indian currency. Countries like Bhutan, Nepal, UAE, Sri Lanka, Bangladesh even Iran, all these countries allowed trade in INR. Also, the India's exports are rising. Total Exports for year 2019-20, 2022-23 and 2023-24 (expected) were (in $billions) 500, 770 and 900 (projected, still waiting for official data).

In a nutshell, there is a strategic need to globalize the rupee, there is political will to do it and the financial requisites are slowly being achieved.