Avoiding the currency basket case 

Avoiding the currency basket case 

Article

The article elaborates on the evolution of Indian rupee and how internationalization of the rupee will benefit the Indian currency.

Important Analysis:

• The Indian rupee was once a multi-lateral currency as its usage prevalent across the Indian ocean in Java, Borneo, Macau, Muscat, Basra and Zanzibar.
• The Gulf had a familiarity with the rupee for five centuries.

Genesis of Indian rupee

• The issuance of new rupee coin dates back to accession of George V to the British throne in 1911.
• The annexation of Sindh, Ceylon and Burma further intensified the presence of rupee in the region.
• Gulf states were using RBI-minted Gulf rupees until 1966.

Transition line

• These countries switched to their own currency after the devaluation of Indian rupee in 1966 after 1965 war.
• Presently, only Bhutan and Nepal conduct bilateral trade with India in rupees.
• Rupee value to dollar has been devaluated from Rs. 3.30 in 1947 to Rs. 7.50 in 1966 to Rs. 32.4 in 1995.

Factors behind devaluation of the rupee

• Wars with Pakistan and China
• Adoption of five year plans requiring foreign loans
• political instability
• oil price shock of 1973

Factors behind recent fall in rupee value

• FII outflows from stocks and bonds
• The ongoing US-China trade war
• Iran sanctions
• Further upward trend in oil prices

Options available for stabilization of rupee

• Intervening in the forex market by selling dollars from the RBI reserves.
• Selling non-resident Indian bonds to raise money.
• Issuance of sovereign bond to raise to debt in rupee form.

What needs to be done to bring rupee in the top 10 traded currencies:

• Rupee payment mechanism– India should consider formalizing the rupee payment mechanism with friendly countries like Russia. For example: rupee swap arrangement between India- Iran, rupee-rouble trade arrangement between India and Russia.
• Industrial growth– These arrangements will work well when we have robust industrial growth.
• A lower rupee can further increase import burden of the country.
• Formalization of the economy– The formalization of Indian economy is also needed.
• Tax rate rationalization– Tax rate rationalization with lower tax rate to increase the tax base and increase compliance with tax returns.

China campaigned hard for the inclusion of its currency in the IMF’s benchmark currency to make yuan “freely usable”.

RBI on the other hand has followed a cautious approach to convert rupee from a largely non-convertible  pegged currency before 1991 to a managed float by taking measures like

• Allowing companies to raise debt offshore
• Creation of masala bonds
• Allowing foreigners to invest in rupee debt onshore

Institutional resistance against rupee convertibility should be reversed.