BY NANTOO BANERJEE
Reserve Bank Deputy Governor T Ravi Sankar is quite right that there is no alternative to the
the internationalization of the Indian Rupee (INR) despite the domestic monetary challenges it will pose. The use of INR in
cross-border transactions should mitigate foreign exchange risks for Indian companies. This will reduce the need to hold large
foreign exchange reserves (forex). At the same time, a globally tradable INR will make India less vulnerable to
external trade and financial shocks while strengthening the bargaining power of Indian companies. “The internationalization (of
INR) will make monetary policy harder, but compromising on growth is not an optimal choice,” Ravi Sankar
However, the RBI Deputy Governor did not explain what is holding India back from making INR an acceptable currency for
global operations. Only last month, the International Monetary Fund (IMF) projected India to fifth place in the world
economy, overtaking the United Kingdom (UK). The country’s GDP is now behind only the United States (US), China,
Japan and Germany. A decade ago, India was ranked 11th among major economies while the UK was fifth
position. Even smaller economies like Mexico and New Zealand have placed their respective national currencies as
world currencies of exchange.
India is among the top 13 importers and exporters in the world. And yet its motto remains soft, struggling to maintain its
value against other currencies with its low demand in the foreign exchange markets. Global hard currencies rarely depreciate
suddenly or whose value fluctuates sharply. The main trading currencies in the world are: the US dollar, the euro, the Japanese yen (JPY),
British pound (GBP), Australian dollar (AUD), Canadian dollar (CAD), Swiss franc (CHF), Chinese yuan
(Renminbi; CNY), Swedish krona (SEK), New Zealand dollar (NZD) and Mexican peso (MXN). The US dollar and the euro are the
the world’s favorite foreign currencies.
A major currency of exchange is also related to the nature and volume of a country’s foreign trade, trade and current.
account balance. The latter corresponds to the balance of trade plus the net income of factors such as interest and dividends from the
the country’s investments abroad, income from services, international trade freight and insurance, and workers
remittances. While India is one of the main importing countries in the world along with the United States, China, Germany, Japan,
UK, Netherlands, France, Hong Kong, South Korea, Italy and Mexico, its export ranking is well below at 13th place. The
the country has been close to consistently running high trade and current account deficits albeit in terms of the current account
balance as a percentage of GDP, India fares well compared to several advanced economies, including the United States and the United Kingdom.
In 2020-21, the ratio of current account balance to GDP in India was 1%. This was an increase of approximately negative
one percent in the previous year. India’s current account-to-GDP ratio, however, is expected to reach -2.60% by the end of the year.
end of this year, according to global macroeconomic models and analysts Trading Economics. India must try to improve its current situation
ratio of account balance to GDP. And, this can be done by some changes in its export-import policy, an increase in
production, a stronger insurance facility, more imports on a fob basis and exports on a cif basis. India has done extremely well
receive foreign remittances. Last year, the country received US$87 billion in remittances, the highest among countries
and far ahead of other major receivers such as China and Mexico.
Despite the continued devaluation of the Rupee against the US Dollar, the INR still holds up well against its peers when its performance is weak.
compared to the start of the 2022-23 financial year. The INR depreciated by about eight percent. The demand for US dollars, the
the world’s most preferred currency, rose due to a combination of rising global inflation, geopolitical instability and the
resulting feelings of risk. Both emerging and developed market economies have come under pressure from the
growing strength of the US dollar. Even currencies such as Euro, British Pound, Yen, South Korean Won, Thai Baht and Chinese
The renminbi is down 14-20%. In comparison, the INR seems more stable although its long-term stability remains
remains a question due to its growing dependence on imports, growing trade deficits and emphasis on foreign speculative money
flows to artificially boost RBI’s foreign exchange reserves and equity indices.
A strong focus on domestic manufacturing is bound to improve INR stability. China has set the best example in
this space. About 95% of Chinese exports in 2021 were concentrated in manufactured goods. machinery and
vehicles were the largest group (48%), followed by other manufactured goods (39%) and chemicals (eight
percent). China’s main imports were also machinery and vehicles (38% of total imports), followed by raw materials.
materials (16%), other manufactured goods (14%), energy (13%) and chemicals (10%). Whereas
energy tops India’s import basket, followed by electronics and gold, machinery and raw materials for manufacturing
rather modest. The focus on domestic manufacturing and the export of manufactured goods will have a markedly positive effect
impact on its import-export trade and therefore on the strength of its currency. And, better inflation control
further contribute to stabilize the INR.
Finally, it may be interesting to take a speculative risk on the monetary challenges that may be linked to internationalization
of the INR. To turn INR into an international currency, RBI and the government must work together to stabilize the value
of Rupee. It is very important, for now. If the rupee is used for international trade and monetary transactions by
countries and forex traders around the world, this will help reduce India’s trade deficit and strengthen its position in the world
market. RBI has, in a circular dated July 11, authorized the settlement of international trade in INR. It also allowed trade
partner countries to invest the “excess balance” in government securities. This is certainly an encouraging step for conversion
INR as global and reserve currency. Converting any currency into forex always involves speculative risk. Do
INR a global currency, the risk is worth taking.