The RBI study on the ?Internationalisation of Currency? concludes that despite persisting weakness, it will be a long time before the dollar is displaced from its role as the global reserve currency. However, strong growth by India and China, which remained relatively resilient through the financial crisis, has resulted in the emergence of the rupee and renminbi (RMB) as possible alternatives to the dollar. However, economic prowess, while essential, plays second fiddle to a currency?s use in trade and financial transaction invoicing, foreign exchange intervention and as an anchor for pegging.
In view of this, greater internationalisation of the rupee is being considered. India?s cautious approach towards capital account liberalisation is an impediment amplified by the fact that it doesn?t permit the rupee to be used for international transactions, except with Nepal and Bhutan. Despite indications that the rupee is gaining acceptability in other countries, limited efforts are being made to enhance its presence in the region, one of which is a bilateral currency swap arrangement (CS) with Japan. It enables both countries to swap their local currencies against the dollar for an amount up to $3 billion. However, CSs and trade agreements involving swaps between the rupee and the currency of its trading partner will be more beneficial towards internationalisation.
To this end, China is increasingly using the RMB in trade with its regional partners. It has signed a series of CSs; the PBOC and other central banks will exchange the RMB, instead of the dollar, with the respective counterparty currencies to support bilateral trade. China is also allowing the issuance of RMB-denominated bonds in Chinese markets. The RMB?s internationalisation will reduce foreign exchange risk for Chinese enterprises while enhancing the international competitiveness of Chinese financial institutions. In contrast, India generally runs a considerable current account deficit. Its capital account is largely closed (the rupee is not fully convertible) and financial markets underdeveloped relative to global standards. This exacerbates the risks of increased exchange rate volatility and the withdrawal of short-term funds and portfolio investments by non-residents consequent to internationalising the rupee.
With the RMB?s rising influence in the region, India must step up efforts to give the rupee greater visibility and presence. Or else, the rupee?s reverie to replace the dollar at some point in the future will remain just that.
feedit@expressindia.com