In the first place, the rupee is not convertible on the capital account and is unlikely to achieve that status in the near term.
Ask yourself a hypothetical question: if you were an exporter of IT services to Europe, would you like to be paid in Bangladeshi takas? This currency cannot be used to pay for imports from anywhere except from Bangladesh, nor can you pay your employees with that currency. Now, India is in a far better shape than Bangladesh, but the Indian rupee shares some of the characteristics that disqualify the taka as a currency for international transactions.
More than 60% of the world’s exports are denominated in dollars, whether these are oil and gas exports or the Panama hats made in Ecuador and peddled across central America.
US dominance of global finance goes back to the Bretton Woods architecture for exchange rates, in which the major currencies had fixed exchange rates with the dollar and the dollar itself was exchangeable with gold at the rate of $35 an ounce.
This scheme was adopted because of the geopolitical dominance of the US in the immediate post-World War II world, which allowed the Americans to pooh-pooh the suggestion of John Maynard Keynes, Britain’s representative at the Bretton Woods talks, to adopt a new global currency, which he had dubbed the bancor, to settle balance of payments.
The dominance of the dollar continued even after the Bretton Woods system of exchange rates was suspended in 1971 and formally abandoned the following year.
The US has been the world’s largest economy, the No. 1 site for global financial intermediation, the largest recipient of net foreign direct investment, and home to the largest number of the world’s largest multinational companies. It, along with its European Allies, is the world’s rule-setter including in finance.
China’s emergence has altered things a bit. In terms of purchasing power parity, the share of China’s GDP in the global economy is a tad higher than that of the US, and it is the largest importer for most developing countries, besides for very many advanced economies. It is by far the world’s biggest exporter of merchandise goods, exporting $3.6 trillion worth of goods in 2022; its exports alone exceeded India’s GDP that year. Yet China’s currency is a lowly straggler in the global financial league tables.
The share of global reserves held in a currency is a good index of its financial importance. The dollar accounts for more than 54% of the total global foreign exchange reserves of $12.3 trillion. The euro’s share is 18.5%, and that of the Japanese yen a little over 5%. The yuan’s share was a little more than 2%, as of the last quarter of 2023, as per the IMF’s data on Currency Composition of Foreign Exchange Reserves.
India’s rupee isn’t in this league. The only currency that is used for holding reserves and, to some extent, for settling foreign transactions without being fully convertible on the capital account is the Chinese renminbi. Yet that deficiency is enough to make China’s currency a minnow in global finance, even as China’s real economy is a giant, both in terms of GDP and trade. In contrast, India’s share in global trade is miniscule.
India’s exports are faring better than earlier. But looking from the point of view of an exporter to India, what is the range of goods that entity can import from India using its export proceeds? Even Russia, which has been accepting rupee payments for the cheap oil it exports to India, finds rupees accumulating, without finding enough goods to import from India.
India’s inflation is higher than that of the US, Europe or Japan. Which means there is constant pressure on the rupee to depreciate against the currencies of these regions, other things remaining the same. Would someone be willing to hold their savings in a currency that loses value against major currencies?
For the rupee to go global, India’s economy must expand and diversify and offer the world a large number and variety of high-quality goods as potential exports. Its macroeconomic management, which rests on fiscal as well as monetary policies, must keep inflation at levels comparable to the countries with hard currencies.
Also, India’s foreign exchange reserves must be large and sound. India has large forex reserves. But these are liabilities for the Indian economy, comprising unabsorbed foreign investment inflows. This is because India runs a current account deficit for the most part, not a surplus, as in China’s case. China’s forex reserves are its assets, in the net, unlike in the case of India.
Indian companies are acquiring new dynamism, global ambitions, and an ability to scale. If we pursue on this path, and fiscal management by the Centre and the states becomes sound, the Indian economy will reach a point where the rupee becomes a global currency.
