Context: We need to set the wholesome and achievable goal of the rupee becoming a global reserve currency by 2047. The journey is the reward.
Need for becoming a global currency reserve:
It is a wholesome goal because it indirectly aligns fiscal, monetary, and economic policy. T
It acts as an indirect way of accomplishing goals: Like overcoming the “five giants of want, disease, ignorance, squalor, and idleness” that needs education, health, infrastructure, low inflation, financial inclusion, high GDP per capita etc.
It’s a legitimate goal because democracies like ours recognise success to be the outcome of fair voting; reserve currency status involves voting by impartial wallets.
Concentration of reserve currency:
Official foreign exchange reserves of about $12 trillion across 150 countries are currently stored in eight currencies: 55 % in US dollars, 30 % in euros, and 15 % in six other currencies.
This concentration is inevitable given exploding trade, rising capital flows, and motivates against protecting your reserves from your currency’s volatility.
Chinese overconfidence: Being a close competitor of India, China still faces transparency issues, and this creates an opportunity for India to take over.
Benefits:
A reserve currency has to serve as a medium of exchange, a store of value, and a unit of account.
The main property of a reserve currency country is trust, and the main upside is the “exorbitant privilege” of lower real interest rates.
Way Forward:
Getting countries to store their reserves in rupee requires luck and skill –
Our luck arises from:
A multipolar world (America now accounts for less than 25 % of global GDP).
The need for diversification (central bank reserves in dollars have fallen to 55 % from 71 % in 1999).
New US thinking about indebtedness (in the last 13 years, their debt increased by $20 trillion equivalent to 90 % of GDP).
Central bank credibility (lower-for-longer creates a quantitative easing addiction).
Demographics (25 % of the world’s new workers in the next 10 years will be Indian).
The UK’s secular decline.
A global shift of economic gravity to Asia and the challenges of trusting China.
Our economic skills have a strong opening balance: India has never defaulted, and the 1991 reforms have been accelerated by big reforms like GST, IBC, inflation targeting, education, labour, and agriculture.
Pursue full capital account convertibility as suggested by the Tarapore Committee in 1997.
Advocate trading partners to start rupee invoicing and raising corporate rupee borrowing offshore and onshore.
Accelerating our CBDC (central bank digital bank currency) plans and taking our UPI payment technology to the world (the dollar gets heft from global networks like Visa, MasterCard and Swift).
Role of Fiscal Policy: It 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 %.
Role of Monetary Policy: It must control inflation while moderating central bank balance sheet size.
Role of Economic Policy: It must raise the productivity of our regions, sectors, firms, and individuals to reach goals in formalisation (400 million workplace social security payers), urbanisation (250 cities with more than a million people), financialisation (100 % credit to GDP ratio), industrialisation (less than 15 % farm employment), internationalisation (higher share of global trade) and skilling.
Reinforcing institutions: That signal rule of law; cooperative federalism, press freedom, civil service effectiveness, and judicial independence.