Can Rupee be a Global Reserve Currency? – UPSC GS3

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Characteristics of Reserve currency
  • A reserve currency has to serve as a medium of exchange, a store of value, and a unit of account.
  • The main properties of a country having a reserve currency are : trust and lower real interest rates.
  • A real interest rate is one that has been adjusted for inflation, reflecting the real cost of funds to the borrower and the real yield to the lender.
Current situation
Official foreign exchange reserves of about $12 trillion across 150 countries are currently stored in eight currencies:
  • 55% in US dollars
  • 30% in euros.
  • 15% in six other currencies.
Positives for Rupee to be a Global Reserve Currency:
Global factors which indicate that India can target making rupee a global reserve currency.
  • 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.
  • Demographics: 25% of the world’s new workers in the next 10 years will be Indian.
  • Strong economic factors: India has never defaulted and the 1991 reforms have been accelerated by big reforms like GST, IBC, inflation targeting, education, labour, and agriculture.
  • Central bank credibility
  • A global shift of economic gravity to Asia
  • Challenges of trusting China.
What needs to be done?
  • First step should be towards full capital account convertibility, as suggested by the Tarapore Committee in 1997. A 2030 deadline for finishing the agenda could be an interim milestone.
  • Ask trading partners to start rupee invoicing, raising corporate rupee borrowing offshore and onshore, accelerating our CBDC plans, and taking our UPI payment technology to the world
  • Effective Fiscal, Monetary and Economic policy agenda.
    • Fiscal policy 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 per cent.
    • Monetary policy must control inflation while moderating central bank balance sheet size.
    • Economic policy must try to achieve the following
      • Formalisation: 400 million workplace social security payers.
      • Urbanisation:250 cities with more than a million people.
      • Financialization: 100 per cent credit to GDP ratio.
      • Industrialisation: less than 15 per cent farm employment.
      • Internationalisation: higher share of global trade and skilling.
  • These goals must be complemented by reinforcing institutions that signal rule of law, cooperative federalism, press freedom, civil service effectiveness, and judicial independence.
Way forward
India needs bold reforms in the next 25 years. Becoming a global reserve currency is a wholesome goal because it indirectly aligns fiscal, monetary, and economic policy.
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