Rupee Going Global?

(MENAFN- Kashmir Observer) Challenges and a reality check

There are various challenges to the rupee becoming an international currency. The first challenge is the convertibility of the capital account. Free conversion allows for the free flow of goods, services, and other financial instruments. India allowed full convertibility on the current account in 1994, which allowed the flow of current account items such as goods, services, etc. But it has not gone for a full convertibility on the capital account; instead, it went for a partial convertibility on it, which meant that there would be no free flow of capital account instruments in and out of the country, such as bonds and loans. There would be regulations put in place by the government of the country to protect the country against any financial risk. Full convertibility depends upon the level of economic development and maturity of the financial system, which is somehow missing in India's case, which signals the fact that the rupee can't be trusted as a medium of exchange. Going for full capital account convertibility is risky, as it makes a country vulnerable to various kinds of risks. China allowed full capital convertibility only in 2010, and the UK in the 1980s two Tarapore committee reports in 1997 and 2006 laid out a path to full convertibility. However, both set up several pre-conditions for the capital account to be fully convertible. For the currency to be an international one, it has to have the capacity to withstand every risk that comes from other countries. According to the former governor, Rangarjan, for the capital account to be fully convertible, the Indian economy must grow at 7% for the next 25 years, and by 2047, India would be able to allow full convertibility on the capital account. The second challenge is the small size of the Indian economy, which is 3% of the world economy. When you have such a small share in the global GDP and trade, you naturally have a trade deficit, and there is no advantage for a bilateral trade partner to trade in rupees. Foreign companies will not accept payment in INR when it is at its all-time low against the dollar. For a currency to be an international one, in Rangarajan's opinion, its fiscal deficit has to be around 3.5% of GDP, gross NPAs around 5%, and CRR 3%, along with a per capita income of $13000. As a matter of fact, its share of global exports was only 2.4% in 2022. The third challenge to it is the concern about the limited liquidity of the Indian rupee. It is not a widely traded currency, with limited liquidity in the market, making it difficult for investors to buy and sell rupee-denominated assets. The majority of the Indian trade is done in US dollars and euros. According to the recent triennial central bank survey, the dollar accounts for 88% of global forex, which, if taken to India's case, is only 2%, which reveals the reality check for everyone who has been debating about the internationalization of the Indian rupee. The net investment position of India is negative. The Indian rupee is held by six out of 130 countries, and the big four-dollar euro, yen, and pound sterling are held by more than 100 out of 130 countries. The fourth challenge is the concern of the underdeveloped financial markets, which provide only limited services for international investors. The total local currency trade volume has been negligible since the project was started. Russia was unwilling to accept the rupee due to exchange rate volatility and asked it to pay in yuan or dirham. Its imports to India are much higher, making the gap too wide, which makes it unfavourable for Russia to do invoicing in INR. Since India is still a developing economy, there has been an overt role played by the state in the form of acting as a catalyst for the grooming of the private sector. One of the conditions for any currency to become international is that the embargo of regulations has to be set free in order for the private sector to move in and out of the country easily, which again is missing in India's case. Arvind Panagariya, professor of economics at Columbia University, says that for the rupee to become an international currency,India must further open its economy and substantially increase its trade. He draws a parallel with the Chinese yuan's inclusion in the SDR basket, suggesting that India could aspire to a similar status in the future. At the same time, when the country is going to make the rupee an international currency, there are other competing countries that pose a huge challenge for the rupee to go global. One such country is the Chinese Yuan. The yuan has the 5th biggest share as a global payment currency at 2.5%. In terms of the global turnover of forex, it has a 7% share versus the Indian rupee's share of 1.6%.

Drawing an inference from the above discussion, it is unlikely for the Indian rupee to go global soon. However, it is likely that it will go global, which will take time and calls for various steps to be taken by the government to strengthen the economy and work at large on the infrastructure of the country, such as social, political, economic, etc. It will happen through an amalgamation of various steps that have to be taken, such as giving people more and more political and economic opportunities.

Views expressed in the article are the author's own and do not necessarily represent the editorial stance of Kashmir Observer

The author is a student of political science and economics at the University of Delhi

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