Why India Should Focus On Overall Economic Policy Certainty

In February 2021, almost four years ago now, reports emerged that the internationalisation of the rupee was inevitable but would complicate the formulation of monetary policy. This was attributed to the Reserve Bank of India’s (RBI) report on currency and finance.

Internationalisation would mean that the rupee could be freely transacted by both residents and non-residents. And here’s the important part: it could be used as a reserve currency for global trade.

The RBI report also said that while this ideal world would lead to lower transaction costs of cross-border trade and investment operations by mitigating exchange rate risk, it would make the simultaneous pursuit of exchange rate stability and a domestically oriented monetary policy more challenging unless supported by large and deep domestic financial markets that could effectively absorb external shocks.

It is not clear whether the RBI was advocating for internationalisation or just pointing out what it would take. Reading between the lines, I would conclude the RBI was assuming that the former was inevitable, to use its own words, and the latter, which is domestic monetary policy stability, was what we had to work on to ensure it worked well.

In short, several leaps of faith, at least as I could see.

The Reserve Bank has been careful to use the term “internationalisation” of the rupee, though it does appear that it is nothing but code for de-dollarisation because it largely means the same, practically speaking, at least.

In March 2023, another headline, or perhaps headlines, said the rupee was closer to replacing the dollar as 18 nations had agreed to trade in the INR. The article referred to a statement in Parliament by India’s union minister of state for finance, who, in turn, referred to a July 2022 circular from the central bank permitting invoicing international payments in rupees. He also said that the RBI had given approvals to several banks to open special rupee vostro accounts (SVRAs), which allowed for settling payments in rupees.

While the countries ranged from Singapore to Sri Lanka, Malaysia, and the Seychelles, the key one was obviously Russia, with whom India has purchased large amounts of crude oil in the last two years or more.

Russia, itself a pariah since it invaded Ukraine, has been floating all kinds of trial balloons on alternative currencies, including a BRICS currency last month. Which likely got US president-elect Donald Trump worked up.

To be fair, there is nothing wrong with aiming to create a currency reserve of your own, though there are problems when an idea gallops faster than strategic plans to ensure its arrival are made. That includes growing an economy to a certain scale and achieving the resultant economic might that goes with it.

Since no other country has done it, including China, whose GDP is almost five times India’s, it is fair to say or expect that nothing will happen in a hurry.

And when incoming President Donald Trump said he would slap a 100% tariff on countries who were dreaming of a BRICS currency, when the prospects for such a currency, were in itself so far fetched, it was interesting to see the reactions.

BRICS countries have no interest in weakening the US dollar at all, India’s foreign minister, S Jaishankar, said at an event in Qatar’s capital, Doha, on Saturday.

The RBI Governor, Shaktikanta Das, on Friday, while announcing his credit policy, said, “As far as India is concerned, the country has not taken any steps specifically aimed at de-dollarization. All that we have done is permit the opening of Vostro accounts and enter into agreements with two countries by now to do local-currency-denominated trade. That is basically to de-risk our trade, since dependence on one currency can be problematic due to appreciation or depreciation.”

Well, to be fair to Das, he has never used the term “de-dollarisation” in the past either and has broadly held the same stance. But India’s almost abrupt leap to clarify is puzzling. If we had a position on the internationalisation of the rupee, however long a project it was, why take a visible step back?

Unless it’s all in the semantics, which is that we will pursue the internationalisation of the rupee but not de-dollarization, which should keep you, the United States, happy.

Barry Eichengreen, Professor of Economics at UC Berkeley, writes in the Financial Times that the dollar will get stronger in the short term and then start getting weaker. He also projects that the Eurozone and China might allow their currencies to depreciate, which will increase their exports into other countries.

Most of all, he argues that economic policy uncertainty has a strong negative effect on investment. “And Trump is an uncertainty machine,” he says.

So while we figure out where we want to take the rupee, it would be wise to remind ourselves that certainty in policy matters most when it comes to the entire spectrum of investment and economic activity.

That would include hopes for creating a reserve currency.