#todayinsight: Advancing the Indian Rupee: Modi’s Call for Global Currency Status Amid Financial Reforms

Narendra Modi, the prime minister of India, asked the central bankers to make the Indian Rupee more accessible in the global markets. April first was the 90th anniversary of the Indian reserve bank. In the first decades after its foundation, the currency issued by the Reserve bank of India was prevalent overseas. Until late 1970, many firms in Arab States used Indian Rupee to settle transactions. However, the things are different nowadays, the Indian Rupee accounts for less than 2 percent of international currency transactions, this is in spite of the fact that the Indian is currently fifth largest in the world.

However, turning a local currency to an international one, needs deep financial and monetary reforms that in many cases politicians are reluctant  about. Having an international currency has important benefits, the inflow of foreign investors make foreign currencies abundant and make the borrowing costs lower for local firms. An international currency lowers the risks of currency trading for the firms as they do not need to convert currency at high frequency. It is also beneficial for the governments and central bankers. It enables them to maintain economic stability with lower central bank reserves.

China started more than a decade ago to make its Yuan an international currency. Yet only 3 percent of transactions on SWIFT are denominated in Chinese Yuan and 80 percent of international Yuan transactions are taking place in Hong Kong. The Chinese capital account is almost closed and this does not allow global investors to freely move in and out. This is the most visible obstacle which prevents the Yuan to become an international currency. 

Besides, Free movement of capital, government’s fiscal accounts and central bank independence and credibility are crucial stipulations for an internationally traded currency. Investors must be sure that the government budget deficit will remain under control and it will use the money printing to pay for the government expenditures. It is also very crucial for investors to be sure that central bank statements are valid  and they would not cheat the markets by producing higher inflation to boost short term economic growth. 

Even the Japanese government only agreed to such reforms after the pressure from the United States and its threat of Tariffs on Japanese exports. But these changes are necessary for any country who wants to join the league of nations with International-traded currencies.

Source: Economist