The goal of making the rupee a global reserve currency

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Capital account

Mains level : Paper 3- Making rupee a global reserve currency

Context

India will celebrate 100 years of Independence in 2047.  This article makes the case that prosperity is possible and best accomplished by the goal of making the rupee a global reserve currency by India@100.

What is the purpose of having forex reserves?

  • Official foreign exchange reserves of about $12 trillion across 150 countries are currently stored in eight currencies: 55 per cent in US dollars, 30 per cent in euros, and 15 per cent in six other currencies.
  • Protection in case of volatility: This concentration is inevitable given exploding trade, rising capital flows, and the less acknowledged motivation of protecting your reserves from your currency’s volatility.
  •  A reserve currency has to serve as a medium of exchange, a store of value, and a unit of account. 

Steps India would require to take

  • Full capital account convertibility: To fulfil the ambition of becoming the reserve currency, the first step is full capital account convertibility, as suggested by the Tarapore Committee in 1997. 
  • Advocate rupee invoicing: Dollar investors in the last decade not experiencing the usual big bite out of rupee returns is useful for advocating trading partners to start rupee invoicing.
  • Offshore corporate rupee borrowing: Raising corporate rupee borrowing offshore and onshore will also help.
  • Digital currency: We need to accelerate our CBDC (central bank digital bank currency) plans.
  • Take payment networks to a global level: We need to take our UPI payment technology to the world, the dollar gets heft from global networks like Visa, MasterCard and Swift.
  • Raise tax to GDP ratio: Fiscal policy must raise our tax to GDP ratio, raise the share of direct taxes in total taxes, and keep our public debt to GDP ratio under 100 per cent.
  • Monetary policy: Monetary policy must control inflation while moderating central bank balance sheet size.
  • Economic policy: Economic policy must raise the productivity to reach goals in formalisation, urbanisation, financialisation (100 per cent credit to GDP ratio), industrialisation (less than 15 per cent farm employment), internationalisation (higher share of global trade) and skilling.
  • Institutional reforms: These goals must be complemented by reinforcing institutions that signal rule of law; cooperative federalism, press freedom, civil service effectiveness, and judicial independence.

How it will help India?

  • Becoming a global reserve currency is helpful because it indirectly aligns fiscal, monetary, and economic policy.
  • Low-interest rate: The main advantage is the “exorbitant privilege” of lower real interest rates.
  • Edge over China: The 2 per cent renminbi share in global reserves — despite a 25 per cent increase last year — doesn’t reflect their status as the world’s second-largest economy and biggest trading nation.
  • China’s astounding economic success seems to be making China overconfident.
  • Chinese overconfidence creates an opportunity for India. 

Conclusion

Prosperity for all Indians by India at100 — a precondition for a country where the mind is without fear and the head is held high — needs bold reforms in the next 25 years. These reforms are best measured by the wholesome and achievable goal of the rupee becoming a global reserve currency by 2047. The journey is the reward.

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