In a recent statement, the Global Trade Research Initiative (GTRI) has suggested that India should prioritize becoming a middle-income country before aiming to make the Indian Rupee (INR) a hard currency. The think tank highlighted that transforming a currency into a hard currency is a complex process that requires certain prerequisites.
Economic stability stands out as a crucial factor in this regard. The country must exhibit low and stable inflation, consistent growth, and a balanced trade environment. Furthermore, effective fiscal and monetary policies, including prudent national debt management and sensible interest rate policies, should be implemented by the government and central bank.
The GTRI emphasized that political stability plays a significant role as well, ensuring confidence and consistency in the economy. However, the think tank acknowledged that the process of becoming a hard currency could potentially destabilize India’s economy. Therefore, it recommended waiting until the economy reaches a middle-income status before pursuing such aspirations.
Promoting Local Currency Settlements and Strengthening the Economy:
While aspiring for hard currency status may not be realistic at this stage, the GTRI suggested that India should focus on making local currency settlements more robust. This approach would allow the economy to stabilize and strengthen, ensuring a smoother and less risky transition in the future.
The think tank highlighted that the rupee’s international trade role is currently limited compared to established hard currencies like the US Dollar or Euro. To enhance the rupee’s position, it is crucial to make it fully convertible on the capital account, a characteristic of hard currencies. However, this move presents challenges, including exposure to volatile capital flows that could destabilize the currency.
Another hurdle mentioned by the GTRI is managing India’s balance of payments, particularly in reducing trade deficits. Persistent trade deficits exert downward pressure on the rupee and undermine efforts towards currency stability. Developing deep and liquid forex markets is also essential to manage large-scale currency conversions without significantly impacting the rupee’s value.
Reforming the financial system, including banking and non-banking sectors, is necessary, but it comes with risks of destabilization during the transition, according to the think tank.
Building Confidence and Perception in India’s Economy:
Becoming a hard currency requires a shift in international perception and confidence in India’s economy and financial systems, which is a complex and prolonged process, emphasized the GTRI.
Instead of striving for hard currency status, India should focus on making local currency settlements more attractive and efficient. The Reserve Bank of India introduced a system for settling international trade transactions in the Indian Rupee in July 2022. However, this system has been deemed ineffective as it requires converting foreign currencies twice, resulting in a loss of transaction value. The GTRI suggested implementing local currency trading to reduce transaction costs by eliminating the need for double currency conversion.
To facilitate this, India needs to establish a transparent and open currency exchange that provides clear and market-determined exchange rates between local currencies like the INR and other currencies.
The Benefits of Local Currency Trading:
By adopting local currency trading, Indian businesses can conduct direct conversions between the INR and other currencies, reducing costs and eliminating unnecessary conversions. Additionally, this approach would provide a reliable reference for banks to issue letters of credit and enable a better understanding of currency volatility for businesses.
Furthermore, countries with currency surpluses, such as Russia, with its surplus of INR from oil exports to India, could efficiently exchange their surplus for other currencies within a multi-currency exchange platform.
Conclusion
Although aspiring for hard currency status is a significant goal, the GTRI suggests that India should focus on becoming a middle-income country first. By promoting local currency settlements and implementing necessary reforms, India can strengthen its economy and pave the way for a smoother transition in the future. Developing a transparent and open currency exchange would also facilitate local currency trading, reducing transaction costs and enhancing trade efficiency for Indian businesses.
