It is quite timely that the Inter-Departmental Group of the RBI has released a report on the internationalisation of the rupee. The talk of making currencies international has gathered momentum ever since the US put an embargo on dealing with Russia. By blocking all payments through the SWIFT system to Russia, the message sent was this can happen to any country. This has led countries to seriously discuss the issue of de-dollarisation, with internationalisation of local currency as part of the package.
If a group of countries decide to conduct business with one another in their currencies, then an optimal solution can be achieved. But the issue is that there will always be surpluses with some countries and deficits for others. Those with a deficit are better off using such arrangements while those with surpluses may not know how to use the currencies as they are not acceptable outside this perimeter.
Therefore, while the regulation on foreigners or Indians holding rupees outside India can be liberalised, getting countries to accept the same is the challenge. Currently, one is not allowed to carry more than ₹25,000 outside the country. An argument put forward often is that this should be withdrawn because if there are takers for the same outside, it saves dollars for the country.
Forex reserves
There are some interesting facts that need to be considered when one looks at internationalisation of currencies. The first is that today around 60 per cent of the world’s forex reserves are held in dollars, 20 per cent in euros, and 5-5.5 per cent in yen and pounds each. Hence 90 per cent of the holdings are in these four currencies.
While China has tried its best to make inroads, the share of its currency is a mere 2.6 per cent; slightly higher than the Canadian and the Australian dollar at 2.4 per cent and 2 per cent, respectively. Therefore, size of the economy does not matter today. China, despite being the second largest economy, is unable to find greater global acceptance of its currency.
Second, the structure of exports throws light on another aspect of global currencies. If a country exports a lot of goods, then there can be an incentive for countries to accept the currency as a mode of payment. World Bank data for 2021 shows that the euro region accounted for 26 per cent of total global exports of $28.16 trillion. The US accounts for a share of only 9 per cent, but the dollar is favoured globally when it comes to holding forex reserves. China has the second highest share in exports of 13.6 per cent, but accounts for a much lower share in forex reserves. Japan follows next with 3.2 per cent, Singapore 2.8 per cent, South Korea 2.7 per cent, Hong Kong 2.7 per cent and India with 2.4 per cent. Canada, Singapore and Russia had shares of around 2 per cent each while Australia had share of just 1.2 per cent. The Australian dollar, however, is a preferred currency by the IMF when it comes to forex reserve holdings. India comes 9th in this ranking, and can hence pitch for inclusion as an international currency.
A third indicator that can be an argument for supporting internationalisation of any currency is the share in FDI outflows. If a lot of domestic investors are investing in other countries, then the currency becomes a strong candidate for internationalisation. UNCTAD’s data on world investment outflows for 2022 shows that $1,489 billion had moved out from countries. Here, the US dominated with a share of 25 per cent. This is followed by Japan with 11 per cent, China around 10 per cent, England 9 per cent, Hong Kong 7 per cent, EU 6.5 per cent, and Korea and Singapore with 3.5-4 per cent each. India’s share is around 1 per cent.
All this data shows that when one is thinking of internationalising the rupee, both the demand and supply sides matter. Policy can drive supply which is the easier option because allowing residents of other countries to hold rupees can be permitted. But the demand for the same can be generated only over time. China has a fairly good share in both global FDI outflows and exports. Yet it is not really favoured as a foreign exchange reserve by most countries. There would however be political and economic factors driving the perception. The value of the yuan is not considered to be market determined and is generally seen as guided by the central bank. This makes it a poor candidate for acceptance.
India is going the right way by making sure that the cogs on the supply side are removed. Allowing rupee trade with other countries is a good step and it needs to be seen how this catches on. Ideally, signing treaties with countries in East and South Asia and the GCC (Gulf Cooperation Council) countries would be useful as the rupee can be used by the receivers to import goods from other nations. In this loop, involving Japan, a developed nation, would be helpful. There was a time when a BRICS loop was spoken of, but given the high level of distrust involving some members, it may not materialise.
A major stumbling block however for internationalising any currency, which will hold particularly so for India, is the sovereign country rating. It can be seen that currencies which are part of the forex reserves basket are mainly in the A+ and above category. Canada and Australia with low shares are rated AAA. The US has a rating of AA+ (Standard and Poor). The euro region has AA, which is the same as the UK. Japan and China have A+.
India with BBB- will find it hard to get universal acceptance, notwithstanding the size of its economy and a fairly dominant position in exports. In fact, the rating is just about investment grade and hence the pitch that is being made by the government regularly is necessary to change the perception.
Having Indian bonds in global indices could be a useful starting point to showcase the strengths of the country and hence the rupee. Therefore, the several steps which are being taken by the government and the RBI together can coalesce to strengthen the case of internationalisation. Ultimately it is perception that matters and India is doing well on this score.
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