Building a Global Currency: Lessons from History and the Path Forward for India

 

Despite India's emergence as the world's fifth-largest economy, the Rupee's presence in global currency transactions is a meager 2%, a stark disparity reflecting untapped potential.

Seventy years ago, the Indian rupee was a familiar sight far beyond India's borders, notably across the Arabian Sea in various sheikhdoms. Even after India's independence from Britain, the rupee's influence remained significant in these regions until the late 1970s. Fast forward to today, and the landscape has dramatically changed. The Indian rupee now accounts for less than 2% of international currency transactions, a stark contrast to India's status as the world's fifth-largest economy. This scenario poses a compelling question: how does a country elevate its currency to a global stature?

Prime Minister Narendra Modi of India has expressed a keen interest in enhancing the global footprint of the rupee. In a speech marking the Reserve Bank of India's 90th anniversary, Modi urged policymakers to focus on making the rupee more accessible globally. However, expressing enthusiasm for globalizing a national currency and implementing the necessary reforms are two distinct challenges. Historically, many leaders have faltered in the latter.

The American dollar currently reigns supreme in the currency domain, but other currencies like the Euro, British Pound, Swiss Franc, and the dollars of Australia, Canada, Hong Kong, and Singapore also play significant roles on the global stage. These currencies serve vital functions in international trade and finance, being integral to foreign reserves and private portfolios worldwide. Theoretically, there is no impediment to the Indian rupee joining this prestigious group.

The benefits of having a widely used currency are substantial. It can lead to lower financing costs for domestic companies and reduce exchange-rate risks for exporters and importers. Furthermore, it can enable a country to decrease its reliance on large foreign-exchange reserves. These benefits are not just economic abstractions but have real-world implications for a nation's fiscal health and international trade dynamics.

India has already started laying the groundwork for the rupee's internationalization. The country now possesses assets that attract foreign investors, potentially making the rupee a valuable store of value overseas. In a notable development, JPMorgan Chase included Indian government bonds in its emerging-market index, followed by a similar decision from Bloomberg. Additionally, the exceptional performance of India's stock market has attracted global attention, indicating the rupee's potential as an international currency.

The Indian Rupee is steadily carving out a more prominent role in the global financial landscape, transitioning from a predominantly domestic currency to one increasingly recognized internationally. This evolution is evidenced by India's proactive measures, notably allowing banks from 22 countries to establish special rupee-denominated accounts. This policy not only facilitates easier international transactions involving the Rupee but also underscores India's commitment to elevating its currency's global status. A landmark in this journey was India's decision to pay for oil imports from the Abu Dhabi National Oil Company in Rupees, a move that highlights the currency's growing acceptance and utility in significant international trade transactions.

To fully grasp the magnitude of India's ambition and the challenges it faces, a comparative analysis with other major economies is instructive. China's efforts to internationalize the Yuan offer a contrasting narrative. Despite commanding a substantial slice of global GDP, the Yuan's role in international trade remains limited, accounting for less than 3% of international trades outside the Eurozone. The majority of these transactions occur in Hong Kong, underlining the restrictive nature of China's capital account and the impediments it poses to the Yuan's broader adoption. On the other hand, Japan's experience during the 1970s and 1980s presents a more optimistic template. Japan's extensive economic reforms, which included deregulating financial institutions and liberalizing capital flows, significantly enhanced the Yen's international standing. These historical examples provide valuable insights for India as it navigates its own path towards currency globalization.

India's ambition to elevate the Rupee to a global currency necessitates sweeping and transformative reforms. These changes must encompass the liberalization of the financial sector, the deregulation of capital flows, and the creation of an environment that is welcoming to foreign investment. Such shifts are poised to disrupt long-standing economic structures and challenge entrenched bureaucratic systems. However, these reforms are indispensable for the Rupee's ascent on the international stage. By following this path, India hopes not only to enhance the stature of its currency but also to secure a more influential and integrated position in the global financial system.

Simply put, India's aspiration to transform the rupee into a global currency is both ambitious and complex. Learning from historical examples such as Japan's success and China's ongoing challenges, India needs to commit to sweeping reforms. These changes, though potentially disruptive, are essential for the rupee to gain global prominence. The journey ahead is not just about changing the international status of the rupee, but about fundamentally reshaping India's role in the global economic landscape.