FE Editorial : Rupee in big league

The second condition is a high quality central bank. The rest of the world will only trust a currency when a sound institutional structure envelopes the printing press where that currency is minted. Such a central bank will have political independence for the narrow function of monetary policy, full transparency of goals and instruments, accountability for achieving an inflation target in the medium term, and a top quality management team. RBI is some way away from this state of affairs. The rupee as a reserve currency issue makes it very clear that especially if India grows fast and over a long period, RBI has to be reformed. A country’s advantages of having a reserve currency go beyond other central banks investing in its short-dated bonds. This fiscal gain aside, since reserves make up the bulk of the portfolios of fixed income investors worldwide, considerable private investment goes into those currencies. Therefore, abundant cheap financing comes to governments and companies of privileged countries whose currencies have that special status. The toll required of an eight-lane expressway is lower because the cost of financing is lower because there is an abundance of investors who want to buy bonds denominated in the reserve currencies. Further, these governments and companies are able to avoid currency mismatches because they borrow in their own currencies. That’s a long list of advantages and should motivate India’s establishment.