China and India are in the vanguard of a wave of growth that is driving the renaissance of Asia toward the global prominence the region had before the European and North American industrial revolution, a prominence where both nations together controlled half the world’s economy. As a result of their growing international trade and financial dominance, India’s central bank, the Reserve Bank of India released a report – Internationalization of currency – The case of the Indian Rupee and Chinese Renminbi.
‘This study examines the recent debate on the need for a new global reserve currency in the context of the recent global financial crisis, which has, to an extent, eroded the confidence in the US dollar as a numero uno global reserve currency and momentum is building up for reforming the international monetary system.’ a prelude to the RBI report says.
The report examines ways in which the Indian rupee and Chinese renminbi could become the global reserve currency, what changes the currencies would need to undertake and their impact. While the report currently rules out any global reserve currency other than the US dollar, it does show promise for the renminbi becoming a regional currency within Asia owning to strong trade links and currency swap agreements with its neighbors.
To make the yuan an international currency, China would have to ease restrictions on flows in and out of the country, make its currency fully convertible for such transactions, continue with financial reforms and make its bond markets more liquid, the report said.
Historically, the Indian rupee was regarded as an official currency of other countries, including Kuwait, Bahrain, Qatar, the Trucial States (United Arab Emirates (UAE) since 1971) and Malaysia in previous times.
Nonetheless, today, the Indian rupee which is fully convertible on the current account but not on the capital account is far from being a global currency, used in international trade. “India needs to take steps to increase the role of the Indian rupee in the region to catch up with the growing influence of the Chinese Renminbi,” the study says. Almost all of India’s trade is concluded in the US dollar. While the Indian rupee is traded in Nepal and Bhutan, and India shares a currency swap agreement with Japan, the rupee is yet not fit to be a global reserve currency due to its volatility triggered by capital inflows owning to its large current account deficit.