China's accession to the International Monetary Fund's elite has left behind India, whose cautious approach to liberalisation means the Indian rupee...
China’s accession to the International Monetary Fund’s elite has left behind India, whose cautious approach to liberalisation means the Indian rupee is unlikely to be a viable candidate for reserve currency status for at least a decade.
China has campaigned hard for inclusion in the benchmark currency basket, and the IMF’s announcement on Monday that the yuan had been added was recognition of its global power status.
Beijing has introduced a flurry reforms to ensure the yuan was considered “freely usable” in IMF parlance, meaning widely used in international transactions and commonly traded.
Indian government also harbours ambitions to increase the country’s clout on the international stage and to extend the reach of its currency, freeing up investment and trade.
After all, in 1980, India was an economy roughly the same size as China. Now China is more than four-and-a-half times larger.
But concerns over broader economic stability in India mean there is little appetite for “big bang” currency reforms, even among top central bank officials who have argued for full convertibility over time, like governor Raghuram Rajan.
That means India could, by some estimates, be over a decade away from following China.
“Our estimates suggest that India’s GDP will still only be around $6 trillion in 2027, i.e. still not as big as China today, and by then world GDP will be still larger,” said Charles Robertson, global chief economist at Renaissance Capital.
“So unless politics plays a role, we doubt India’s rupee will be a global reserve currency before 2030.”
NO “BIG BANG”
Rajan, answering questions on the IMF’s yuan move, said on Tuesday that India was moving in the right direction.
“We are steadily moving towards being a much more open economy, while keeping some of the concerns about stability, making sure we have things broadly under control,” he said.
He detailed steps taken by the Reserve Bank of India towards a freer rupee: allowing companies to more easily raise rupee debt offshore, with “masala bonds”, and allowing foreign investors to invest more in rupee debt onshore, for example.
“All these (steps) are in the direction to broaden and open up a little more, but at the same time it is not a big bang, where we lose control,” he said. “It is a steady process.”
By contrast, he observed that it was unclear whether China would continue to open up at the current pace.
“Post getting in, pressure may not be as much as before going in,” he said in an interview with CNBC-TV18.
Since India began opening up its economy in 1991, it has gone from a largely non-convertible, pegged currency to a regime that is effectively a managed float, meaning there is a currency market, but the RBI intervenes to contain volatility.
SLOW AND STEADY
Under Rajan, a former chief economist at the IMF, the central bank has steadily acted to open up Indian markets.
On Monday, it eased rules for offshore borrowing, allowing foreign insurers, pension funds and sovereign wealth funds to lend to Indian corporates more easily, and for longer.
“That is basically capital account liberalisation, which is being done in a prudent and pragmatic manner and becoming more rules-based,” said Rahul Bajoria, regional economist at Barclays. “That is a very good signal.”
But with major structural reforms to push through to make India competitive on a global scale, analysts and economists said there was little expectation India could catch up quickly with over a decade of reform in China.
“China started liberalising since 2005, so it has taken them about 12-13 years,” said Bajoria, pointing to major market and currency reforms.
“From that perspective we still have a long way to go.”
According to payment services provider Swift, in September the yuan was fifth in the ranking of currencies used for international payments.
The rupee is not ranked in the top 20, a list that ends with Hungary’s forint, the currency of a country with a population 1/125th the size of India’s.