In recent years, there has been a growing movement towards “de-dollarisation” – a shift away from the US Dollar as the world’s dominant currency in international trade. Some argue that the Indian Rupee could be one of the currencies to replace the Dollar, thanks to India’s large and growing economy. However, there are still several significant challenges that must be overcome before the Rupee can become a global currency.
Currencies play a vital role in the global economy. They serve as a medium of exchange for goods and services, and their stability is essential for economic growth and development. However, some currencies do not yet have a strong track record in terms of stability, and the Indian Rupee is no exception. Last year, the INR depreciated more than 10%, highlighting the importance of stability for a currency to be accepted globally. In this blog post, we will discuss the stability of the Indian Rupee and the steps taken by the Indian government to improve economic stability.
Factors Affecting the Stability of a Currency
Before discussing the stability of the Indian Rupee, let’s understand the factors that affect the stability of a currency. The stability of a currency depends on the inflation rate, economic growth, fiscal policies, and monetary policies of a country. A stable currency has a low inflation rate and a steady economic growth rate, which ensures that the currency retains its value over time. Additionally, the fiscal and monetary policies of a country should be in sync to avoid fluctuations in the exchange rate.
Inherent Risks of Rupee Trade
One of the biggest challenges facing the Rupee is its inherent risks. No country is going to jump into the Rupee trade given the risks associated with it. The Euro, which represents almost 20 countries, couldn’t dislodge the USD, despite its attempts to become a global currency. The Euro’s weak economy made it difficult to compete with the US, and many countries still prefer to trade in Dollars.
Take the IPL, for example. In the first few editions, players were auctioned in USD, which meant the exchange rate risk was on the franchisee. However, owing to the huge demand and the hefty pay packs, players later agreed to be paid INR. Today, auctions happen in INR. But on receiving their pay, the players won’t hold the Rupees. They convert into USD/ EUR. All that has happened is that the exchange rate risk has shifted to the player. It does not mean Rupee is getting accepted in global trade.
Two countries, say Thailand and Srilanka, may decide to price their trades in INR. But currently, we are far, far away from that scene today. Countries will be happy to receive payment in Rupees if they have significant payouts in Rupees (Imports from India).
Importance of Platform
While it may be a distant dream to see the Rupee accepted globally, the steps India is taking to de-risk its Dollar dependency are important. Creating a platform for trade in local currencies is like laying the road to a village. It is not the same as people wanting to come to the village, but knowing that there is a good road might tempt someone to plan a trip, and eventually, traffic will improve.
Stability of the Indian Rupee
The Indian Rupee has not had a great track record in terms of stability over the years. For currencies to be accepted globally, stability is crucial. The INR has witnessed significant fluctuations in its value against major currencies like the US dollar and the Euro. Last year, INR depreciated by more than 10%. That is bad news if you wish to be a global currency. The primary reason for the depreciation of the INR is the increase in the trade deficit, which has resulted in high demand for foreign currencies.
For a currency to be stable, inflation needs to be near zero, and the supply side of the economy must be taken care of. The Indian government has taken several steps to improve economic stability, such as implementing inflation-targeting and promoting economic growth through structural reforms.
Steps Taken by the Indian Government
The Indian government has taken several steps to improve the stability of the Indian Rupee. One of the significant steps taken by the government is the implementation of inflation targeting. The Reserve Bank of India (RBI) has set a target inflation rate of 4% with a band of +/- 2%. The implementation of inflation targeting has helped to stabilize the INR by keeping the inflation rate under control.
Another step taken by the Indian government to improve economic stability is the promotion of economic growth through structural reforms. The government has implemented several structural reforms like the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC) to boost economic growth. These reforms have led to an increase in foreign investments, which has helped to stabilize the INR.
In conclusion, while the Indian Rupee has the potential to be a global currency, there are several significant challenges that must be overcome before that can happen. The inherent risks associated with the Rupee, as well as its lack of stability, are two of the biggest obstacles. However, the steps India is taking to de-risk its Dollar dependency and create a platform for local currency trade are important. The Indian government has taken several steps to improve economic stability. The implementation of inflation targeting and the promotion of economic growth through structural reforms have helped to stabilize the INR. These steps could help to pave the way for a future where the Rupee is accepted globally.
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