Like Chinese renminbi,rupee also a contender for global status: RBI

It said the recent global economic downturn and weakness of the US dollar in the international market has prompted a wide-ranging debate on the need for a new global reserve currency. It is quite unlikely that the dollar will lose its predominance as global reserve currency in the foreseeable future. The current crisis has,however,thrown open the debate on the need for a new global reserve currency in case the US economy fails to make a significant turnaround and the weakness of the US dollar persists making its continuance as a global reserve currency unsustainable.

The RBI study noted that significant strength exhibited by the Indian rupee in the recent months and continued good performance of the Indian economy have raised the issue of greater internationalisation of the Indian rupee. India has so far followed a calibrated approach towards capital account liberalisation. “India,at present,does not permit rupee to be officially used for international transactions except those with Nepal and Bhutan though there are indications of the Indian rupee gaining acceptability in other countries,” it said.

There are,however,problems associated with internationalisation of the rupee as it could increase volatility of its exchange rate. Withdrawal of short-term funds and portfolio investments by non-residents could also be a major potential risk of internationalisation of the Indian rupee. Unlike China,which runs a large current account surplus,India generally runs a significant trade and current account deficits. The Indian rupee is rarely being used for invoicing of international trade. Further,all the necessary preconditions need to be in place before India could proceed further on the issue of internationalisation of the rupee,the study said.

The study noted that Chinese authorities have taken a number of steps to bring about greater internationalisation of renminbi which is already visible in transactions with its neighbouring economies. China has,for instance,promulgated provisional rules governing the issuance of renminbi-denominated bonds by international development institutions; allowing non-residents to issue in Chinese markets the so-called panda bonds; People’s Bank of China (PBOC) has entered into a series of bilateral currency swap agreements whereby the PBOC and other central banks have agreed to exchange the renminbi (not the US dollar) with the respective counterparty currencies,mainly for supporting trade between these countries; Hong Kong is increasingly becoming an offshore Renminbi trading center and the Chinese government is fully supports the move.