Could Rupee and Renminbi be an international currency?

RBI published a very useful staff study on the subject of international currencies. It is written by Rajiv Ranjan and Anand Prakash, economists at RBI. It is pretty short one also.

One major topic of reform is international monetary system. Within international monetary system, an important question is which currency should be used for international transactions? US Dollar rules the international transactions space for many years now but this crisis has shown the need to have an alternate currency. The study looks at whether Renminbi and Indian Rupee can serve as alternatives. More importantly it looks at all the economics of international currency.

The recent global economic downturn and weakness of the US dollar in the international market has prompted a wide-ranging debate on the need for a new global reserve currency. It is quite unlikely that the dollar will lose its predominance as global reserve currency in the foreseeable future. The current crisis has, however, thrown open the debate on the need for a new global reserve currency in case the US economy fails to make a significant turnaround and the weakness of the US dollar persists making its continuance as a global reserve currency unsustainable.

The issue of a new global reserve currency is attracting the attention of policy makers all over the world in recent times. The issue has assumed significance for Asian central banks, including the Reserve Bank of India, which have invested a significant proportion of their reserves in dollar denominated assets. Any sharp depreciation in the value of the dollar would entail significant losses to these central banks. The moot question, however, is which currency is capable of replacing the US dollar in the medium to long-term. China has already stepped up its efforts towards greater internationalisation of renminbi.

The study is descriptive and analytical in nature and draws upon various recent studies on the issue of internationalisation of currency, especially in the context of Chinese renminbi. The study thus provides an in-depth analysis of various issues pertaining to internationalisation of the Chinese renminbi and the Indian rupee.

What are the broad conclusions?

The paper concludes that it is quite unlikely that dollar will lose its predominance as global reserve currency in the foreseeable future. However, whether the Renminbi realises its potential as an international currency that is in line with the size of the Chinese economy will depend on market choice, Government policies pertaining to financial liberalisation, currency convertibility and also on political elements. The study avers that against the backdrop of volatile capital flows, cautious movement towards internationalising the rupee is in order as the size of the country in terms of GDP, volume of trade as also the turnover in the foreign exchange market when compared with global dimensions is small. However, India needs to take steps to increase the role of the Indian rupee in the region.

What makes a currency international?

There is no well-established framework to defi ne what is meant by internationalization of a currency. Theoretical discussions, however, give a guideline for understanding what are the functions that an international currency plays. Kenen (1983) gave an early thought on the roles of international currencies. Chinn and Frankel (2005) developed a list of international functions of an international currency.

According to them, an international currency has to be capable of playing roles of store of value, medium of exchange and unit of account for both residents and non-residents. More specifi cally, it can be used for private purposes, such as, currency substitution, trade and financial transaction invoicing and denomination. It can also be used for public purpose as offi cial reserves, vehicle currency for foreign exchange intervention and anchor currency for pegging.

Where does Renminbi fit? No where as of now

Table 1: Summary of international/regional use of the Renminbi
Function of
Governments Private sectors
Store of value International reserves None Currency substitution None
Medium of exchange Vehicle currency• payment currency in BSAs (with Korea, Japan and the Philippines) under the CMI
• bilateral swap arrange-ment between central banks (with Korea, HKMA, Malay-sia, Argentina and Belarus)
Invoicing currency• Trade settlement in RMB (with Vietnam, Mongolia, Cambodia. etc)
• RMB loans in HK
• RMB bond issuance in HK by policy and commercial banks
• RMB government bond issuance under ABF2
• RMB equity issuance (H share)
Unit of account Anchor for pegging None Denominating currency
ABF: Asian Bond Fund, BSAs: Bilateral Swap Arrangements, CMI: Chiang Mai Initiative,
HKMA: Hong Kong Monetary Authority.
Source: Chinn and Frankel (2005).

But changes are being made. Read the paper for details.

What about Indian Rupee? I liked this history:

Historically, the Indian rupee was regarded as an offi cial currency of other countries, including Kuwait, Bahrain, Qatar, the Trucial States (United Arab Emirates (UAE) since 1971) and Malaysia in previous times. The Gulf rupee, also known as the Persian Gulf rupee, was introduced by the Government of India as a replacement for the Indian rupee for circulation exclusively outside the country with the Reserve Bank of India [Amendment] Act, May 1, 1959. This creation of a separate currency was an attempt to reduce the strain put on India’s foreign exchange reserves. After India devalued the rupee on June 6, 1966, those countries still using it – Oman, Qatar and UAE – replaced the Gulf rupee with their own currencies. Kuwait and Bahrain had already done so earlier in 1961 and 1965, respectively.

INR is far off from being an international currency but given the increased importance of Indian economy, we can keep moving towards the objective. But again there are differences between India and China:

The significant strength exhibited by the Indian rupee in the recent months and continued good performance of the Indian economy have raised the issue of greater internationalization of the Indian rupee. India’s has hitherto followed a calibrated approach towards capital account liberalization. India at present, does not permit rupee to be officially used for international transactions except those with Nepal and Bhutan though there are indications that Indian rupee is gaining acceptability in other countries. There are problems associated with Internationalisation of the rupee as it can increase volatility of its exchange rate. Withdrawal of short-term funds and portfolio investments by non-residents can be a major potential risk of internationalization of the Indian rupee.

Unlike China, which runs a large current account surplus, India generally runs a significant trade and current account deficits. Similarly, its capital account is still relatively closed and Indian financial markets lack depth compared to global standards. The Indian rupee is rarely being used for invoicing of international trade. All the necessary preconditions need to be in place before India could proceed further on the issue of internationalization of the rupee. In view of this, India needs to proactively take steps to increase the role of the Indian rupee in the region.

Very useful paper.


As I said how RBI can publish more research, we are getting some great stuff. I think this is the first staff study. RBI also has been releasing its DRG studies.  It released this one recently Regional Inequalities in India in the 1990s: Trends and Policy Implications.

One Response to “Could Rupee and Renminbi be an international currency?”

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