Now, India questions dollar dominance

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Forex reserves up $1.52 billion

: India has joined Russia and China in questioning the supremacy of the dollar while calling for a rethink of how global currency reserves are composed and managed.

Chairman of the Prime Minister’s Economic Advisory Council, Suresh Tendulkar on Saturday said he was urging the government to diversify its $264.6-billion foreign exchange reserves and hold fewer dollars. “The major part of Indian reserves is in dollars — that is something that’s a problem for us,” Tendulkar said in an interview in Aix-en-Provence, France, where he was attending an economic conference. Big dollar holders face a “prisoner’s dilemma” in terms of managing their holdings, he said, adding, “That’s why I’m telling them to do this.”

Tendulkar’s statement is significant coming just ahead of the G8 summit in Italy next week, which will also be attended by Prime Minister Manmohan Singh as well as leaders from China and Brazil.

“The major imbalances which led to the current situation, the current account surpluses and deficits, have to be addressed… Currency adjustment is one thing that suggests itself, he said. World currencies needed to adjust to help unwind trade imbalances that have contributed to the global financial crisis, he added.

For all the complaints about the dollar, emerging markets such as India remain dependent on the currency of the US, the world’s largest economy and a $2.5-trillion export market. The IMF said on June 30 that the share of dollars in global foreign-exchange reserves increased to 65% in the first three months of this year, the highest since 2007.

Tendulkar said the matter needs to be taken up in international talks, and that it emphasises the need for those talks to go beyond the traditional G-8. “They can meet if they want to,” he said. “The G-20 has a wider role, has representation of the countries that are likely to lead the recovery process.”

As the G-8 talks have neared, China and Russia have stepped up calls for a rethink on global currency reserves, underlining a power shift to emerging markets from the developed nations that spawned the financial crisis.

“There should be a system to maintain the stability of the major reserve currencies,” former Chinese vice-premier Zeng Peiyan had said in a speech in Beijing recently, highlighting China’s concerns about a global financial system dominated by the dollar.