Media article

Has the time come for INR to become rupee as reserve currency?

Vikas Vasal
Vikas Vasal
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The recent Indian blockbuster movie RRR ticked all the boxes – scale, entertainment, and box office collections. Set in 1920, the epic action drama is believed to be one of the most expensive and among the highest-grossing Indian films to date. It’s probably time to replicate the same success for the INR (Indian Rupee) so that it becomes the RRC (Rupee as Reserve Currency) in near future.

A currency gains its status as a reserve currency when it is widely used in international trade and the governments / central banks are prepared to hold it as part of their foreign exchange reserves. Any global currency derives its status primarily from the inherent strength and stability of its economy, and the trust that is put by the other transacting parties – governments, intuitions, and businesses, on such currency to hold ground in case of any crisis.

Opening new doors: Powering up the INR

The Reserve Bank of India’s (RBI) recent move (as on 11 July 2022) to allow international trade in INR is not sudden. It is, in fact, a well-planned and a well-timed one! At the outset it may appear to be one of the many liberalisation initiatives undertaken by the government and the regulators over time. This move could be the beginning of a new journey for INR – to become an international currency and gain the status of a global (reserve) currency.

While it’s understandable that most macro-economic transformations happen over years and it takes time for the results to be visible, change, even at a slow pace, is progressive and should not be underplayed.

FERA to FEMA: a shift in the ‘mindset’ of the nation

A case in point is Foreign Exchange Management Act, 1999 (FEMA) replacing the erstwhile prohibitive and restrictive Foreign Exchange Regulation Act, 1973 (FERA). Since the enactment of FEMA, the Indian economy has witnessed continuous progress and liberalisation in the foreign exchange regime.

The move from FERA to FEMA was a game changer and resulted in a major mindset shift – the nation that believed “it cannot be done, except for few things” moved to “it can be done, except for few things” on the foreign exchange front.

Fast forward to 2022, India is a USD 3.3 trillion economy, poised to become a USD 5 trillion economy by 2026-27 and likely to double in size to USD 10 trillion by 2032-35

Entering new territories: INR on the global map

Countries maintain foreign exchange reserves to meet their current and future requirements, and to provide stability to their respective currencies. Generally, the foreign exchange reserves are maintained by the countries in the form of foreign currency assets (banknotes, deposits, bonds, treasury bills and other government securities), gold, International Monetary Fund’s (IMF) Special Drawing Rights (SDR) and reserve positions with IMF.

The SDR is an accounting unit for IMF transactions with member countries and acts as a stable asset in countries international reserves. At present, IMF’s SDR currency basket consists of five currencies - US Dollar, Euro, Chinese Yuan, Japanese Yen, Pound Sterling. These currencies represent the five largest regions/countries by GDP and their role in global trade and finance.

India is the sixth-largest economy today and is likely to be the third-largest economy by 2032-35. In purchasing power parity terms, it is already the third largest economy in the world. As India steadily progresses and marches towards becoming one of the largest economies in the world, it is high time for the INR to stake claim at the global currency tables.

Being ‘self-reliant’ to provide ‘sensibility’ to the world

The recent pandemic and geo-political developments, and their aftereffects have made countries to re-think their future strategies. The disruption in supply chains, sanctions on institutions and currencies, and restrictions on free flow of trade and money, have led to serious challenges in many parts of the world. India, too, is not alien to the future potential threats from different quarters.

The clarion call given by the Hon’ble Prime Minister on being a #AatmanirbharBharat must be embraced in all its aspects including on the international trade and currency front. The first step in this direction is to start bi-lateral trade in INR with willing/neighboring countries in Southeast Asia, Middle East, and Africa. Subsequently, open other avenues for INR to be accepted and traded as a reliable international currency deriving its strength from an economically (and militarily) strong, largest democracy in the world – India.

If things go well and India continues its growth journey, with regular reforms then despite multiple challenges, the INR should become one of the global (reserve) currencies in the next 20 years.

In RRR style, yeh to abhi trailer hai, Picture abhi baaki hai…

The journey has just begun!