{"id":248624,"date":"2023-06-19T20:00:39","date_gmt":"2023-06-19T14:30:39","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=248624"},"modified":"2023-06-19T20:00:39","modified_gmt":"2023-06-19T14:30:39","slug":"a-reserve-currency-differs-from-one-that-payments-are-settled-in","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/a-reserve-currency-differs-from-one-that-payments-are-settled-in\/","title":{"rendered":"A reserve currency differs from one that payments are settled in"},"content":{"rendered":"\n

Source-<\/strong> The post is based on the article \u201cA reserve currency differs from one that payments are settled in\u201d published in the \u201cmint\u201d on 19th June 2023.<\/p>\n

Syllabus: <\/strong>GS3 \u2013 Indian Economy \u2013 Money and Currency<\/p>\n

Relevance- <\/strong>Issues related to external account<\/p>\n

News<\/strong>– There has been a lot of discussions recently on the international usage of the US dollar as a reserve currency.<\/p>\n

What is a reserve currency? <\/strong><\/h2>\n

It is the currency held by countries as foreign exchange reserves<\/strong>. These are required to meet the gap between a country\u2019s international payments and receipt<\/strong>s. It serves as a buffer to meet any contingency. <\/strong><\/p>\n

Such reserves can be held in the form of gold or any foreign currency<\/strong> that can be freely used or fully convertible currency<\/strong>.<\/p>\n

What are its characteristics? <\/strong><\/h2>\n

It should not be subject to any controls by the country that issues it. USD as a reserve currency <\/strong>is based on its credibility<\/strong>.<\/p>\n

The second requirement for a reserve currency is that there should be sufficient availability<\/strong> of that currency to be held as reserves.<\/p>\n

Countries should be prepared to expand their currency in amounts sufficient to be held by other countries as a reserve asset. It means running current account deficits on a sustained basis. <\/strong>This is known as the Triffin\u2019s paradox.<\/strong><\/p>\n

A reserve currency should be available for investment in liquid form<\/strong>. Ensuring liquidity in a currency requires well developed debt and equity markets<\/strong> in that currency.<\/p>\n

What is the historical experience associated with reserve currency?<\/strong><\/h2>\n

Historically, gold has been used as a reserve currency<\/strong>. Over time, the supply of gold was not enough to meet the growing needs of trade and investment.<\/p>\n

This saw the emergence of reserve currencies<\/strong>. Currencies of dominant imperialist countries <\/strong>like the UK were accepted for international payments.<\/p>\n

Initially, the UK\u2019s pound sterling<\/strong> was the currency of choice<\/strong>. It could always be converted to gold by the Bank of England. It lost its reserve currency status<\/strong> as it abandoned the gold standard <\/strong>during the Great Depression and became bankrupt following World War II.<\/p>\n

As the US began to dominate the global economy<\/strong>. it became the preferred reserve currency.\u00a0 <\/strong>The trend ended in 1971 and the US abandoned the gold exchange standard. <\/strong><\/p>\n

The freely floating exchange rate system<\/strong> emerged after it. Countries declared the exchange rate system of their choice<\/strong> and their currency of intervention<\/strong>. Most countries picked the USD for it. The system has broadly stayed the same since then.<\/p>\n

One major change was the emergence of the euro as a single currency<\/strong> for countries in the Eurozone.<\/p>\n

The currency composition of allocated reserves<\/strong> in 2022 as compiled by the IMF shows that 58% of reserves are held in USD and 19% in euro.<\/strong><\/p>\n

Do recent global events following US sanctions threaten the use of the USD as a reserve currency? <\/strong><\/h2>\n

Countries today are going alternate currency and even payment arrangements<\/strong> for their global transactions.<\/p>\n

China allowed limited convertibility <\/strong>by letting non-residents hold renminbi accounts<\/strong> for trade payments.<\/p>\n

In 2015, it introduced the Cross-Border Interbank Payment System (CIPS)<\/strong>, backed by the People\u2019s Bank of China.<\/p>\n

It offers clearing and settlement services<\/strong> for its participants in cross-border renminbi payments and trade. But it does not mean that the Chinese currency can become a reserve currency<\/strong>, unless it becomes fully convertible. <\/strong><\/p>\n

In 2022, the RBI introduced an additional arrangement for invoicing, payment and settlement<\/strong> of exports\/imports in Indian rupees through Special Rupee Vostro Accounts. <\/strong><\/p>\n

It allows increased invoicing of trade in INR without multilateral settlement<\/strong>. But, they are not very different from India\u2019s bilateral trade and payment arrangements<\/strong> with Russia.<\/p>\n

Geo-political considerations <\/strong>and the covid-19 experience of supply chain disruptions<\/strong> also forced countries to enter trading blocs and set up their own payment arrangements. <\/strong><\/p>\n

The role played by a reserve asset, however, cannot be replaced or minimised by these payment arrangements. <\/strong><\/p>\n

A national currency<\/strong> serving as a reserve currency with key characteristics of convertibility, usability and availability<\/strong> will continue to be needed. The role of the USD will continue to be important.<\/p>\n","protected":false},"excerpt":{"rendered":"

Source- The post is based on the article \u201cA reserve currency differs from one that payments are settled in\u201d published in the \u201cmint\u201d on 19th June 2023. Syllabus: GS3 \u2013 Indian Economy \u2013 Money and Currency Relevance- Issues related to external account News– There has been a lot of discussions recently on the international usage… Continue reading A reserve currency differs from one that payments are settled in<\/span><\/a><\/p>\n","protected":false},"author":10320,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[216,11125],"class_list":["post-248624","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-gs-paper-3","tag-mint","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/248624","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10320"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=248624"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/248624\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=248624"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=248624"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=248624"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}