Can Indian rupee replace dollar?

Even as the global economy is gradually moving towards de-dollarisation, it provides a fair chance for Indian Rupee (INR) totake over as the globally accepted currency in the years to come.Interestingly, Indian rupee has become the fourth international currencyafter US dollar, pound and euro accepted on currency exchange counters inDoha and Qatar.

International trade in the domestic currency will help reducetransaction cost for the industry and several countries are indiscussion with the RBI on this, Commerce and Industry Minister PiyushGoyal said recently.

Last year, the Reserve Bank of India (RBI) and finance ministry asked the top management ofbanks and representatives of trade bodies to push export and importtransactions in the rupee. They want banks in India to connect withtheir foreign counterparts for opening special rupee vostro accountsto facilitate cross-border trade in the Indian currency rather thanthe popular mode of the US dollar. Goyal said that today severalcountries are realising that in trade, there is a need for change incurrency for that and it involves a conversion cost, which in turnincreases transactions cost too.

When more trades begin to settle in currencies other than dollar, theprocess is called de-dollarisation. The petro dollar is biggest tradein the world economy but if settlements begin in other currencies thenthe petro dollar would be decimated.Thus far the currency world was quite unipolar, meaning American dollar is rulingthe roost. But now, the emerging markets and a few othercountries are actively exploring alternatives to the greenback.

Talking to Bizz Buzz, M Narendra, former CMD, Indian Overseas Bank, said, “Currently,majority of international transactions takes place in US dollar as it represents as a reserve currency, medium of exchange and unitof account. Attempts should be made to move away from dollar so as toreduce excessive reliance on single currency inview of negativeimpact in periods of extreme volatility due to any economic,financial or monetary policy factors.”

There are also implications due to geo-political reasons. The recent Russia-Ukraine war, on account of economic sanctions imposed by US, suspension of Swift transactions with Russia, few of countries including India will have to find alternative payment of settlement inforeign trade. The alternative reserve currency as against US dollaris euro and Chinese yuan, he said.

The internationalisation of these alternative currencies withincreased usage in cross-border transactions, investment and reserveassets, can help in financial stability at times of volatilityarising out of dependence on single currency.

One is the self-belief among the countries in establishing a levelplaying field in world trade.Secondly, the USA is headed for or is already in, recession.The greenback has been dominant for such a long time that even its allieswere quietly but visibly fretting about their dependencies on thedollar. Euro was and continues to be an alternative, but has beenhobbled by its internal contradictions.The British Pound has its own frailties, more so now with Brexit.So,countries are coming together to try and leverage their economicnumbers and clout and create alternate channels for payment andsettlement are confident and optimistic that this time they willsucceed.

MV Hariharan, former DGM, SBI,said:“Taking or exercising the choice to move away from the dollar peg tosay, gold can be a good idea.”It’s a pretty long haul ahead and lot of work is yet to be done bythese countries to make their ideas viable and effective. Barter willwork too. This will reduce the prices and also penetrate and expandtrade. Settlement for the oil bills and the determination to use everyavailable avenue to pay for goods and services in alternate currencieswith a credible peg will determine how soon and how far these effortsare sustainable.Unity among the participants is vital since the success of thisventure will be beneficial to shared economic and financial interests,Hariharan said.

As many as 22 foreign central banks and currency boards have peggedtheir currencies to dollar. Greenback is the cheapest means of access toacquire nominally risk-free US treasury instruments. People arehabituated working in the dollar, getting out of it will be a verydifficult and costly affair.

Explaining the move that the replacements to dollar, Anil KumarBhansali, treasury head, Finrex Treasury Advisors, said, “Thereplacements being discussed are crypto currencies, CBDC, basket ofcommodities which represent a given nation’s or region’s competitiveadvantage.”

A recently held conference in New Delhi of Russia, China, India, SouthAfrica touched upon a plan to focus on increased cooperation and havea common currency for settlement of trades amongst themselves andcertain other nations. This could be termed as Bretton Woods – III.

There are high barriers to exit and switching costs, and most of theinternational community be it individuals, firms, governments ortraders think and trade in dollars. The transformation could takedecades. Currencies like Yuan are pegged to the dollar and do notfloat. Its exchange value is not subject to market forces and allowsChinese monetary authorities to adjust its value to benefit itsexports. The Chinese capital account is also closed. If the dollarwere to lose its reserve currency status, neither the dollar norAmerica as a nation would disappear. The English Pound which was oncethe world’s reserve currency still exists.

Transactions in less liquid currencies will be more inefficient andcostly and could bring about more underdeveloped practices andtechnology than the already established practices of dollar. But given theincreasing use of US dollar to impose sanctions, some foreign powers see theneed to develop the capability to transact outside the US dollar basedsystems. The US Fed’s missteps in particular those which have led tohighest inflation in 40 years are feeding an instinct to develophedges against US monetary policy. New reserve currency ideas go longback. But recent developments suggest explicitly pursuing non-dollartrading relationships. The knock-on effects of changes of this sort,even if developed gradually may be more far-reaching than anyone mayenvision.

The US dollar may not go down much against other currencies in thenear future as the potential for further rate hikes are there andflight to safety during uncertainties, Emkay Global Financial Services said in a report.The Indian rupee may gain some ground due to year end repatriationsand once the supply dwindles the currency may become weaker again, itsaid.