India must make rupee a global reserve

Discussion in 'Economy & Infrastructure' started by ejazr, Jan 25, 2011.

  1. ejazr

    ejazr Stars and Ambassadors Stars and Ambassadors

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    India must make rupee a global reserve
    Bharat Jhunjhunwala
    Iran supplies 16 percent of the oil imported by India.That country holds second largest reserves of oil in the world. It is necessary to ensure continued supply from this source in order to safeguard energy security of the country. But our government is working in the opposite direction.

    The matter is connected with the global financial system. Most of the global trade was conducted in US dollars before the crisis of 2008. The Indian importer of computers from Japan, for example, bought dollars by depositing rupees with Indian banks. He remitted the dollars to the Japanese exporter. The Japanese exporter deposited the dollars with his bank and obtained Yen. The global trade in oil was conducted similarly. This provided huge benefits to the United States.

    Say, a supplier insists that he will accept payments only by cheques issued on a State Bank of India account. As a result the businessman opens an account with the State Bank. He keeps a large amount in his Current Account to enable these transactions. His peon has to go to the bank frequently. Hence he has the savings account of his family members opened in the same bank. He makes fixed deposits and starts making payment to other suppliers from the same bank. All these can be done in another bank but got done spontaneously in the State Bank at the behest of one supplier. The bank benefitted immensely in the process. The oil trade undertaken in US dollars provided similar benefits to the United States. Countries maintained huge balances in their current account with New York banks to make payments. They were encouraged to buy Treasury Bills issued by the US Federal Reserve to maintain their foreign exchange reserves.

    Developing countries often found it difficult to maintain such huge balances in the US banks. The United Nations Economic and Social Commission for Asia and Pacific helped establish the Asian Clearing Union (ACU) to help the developing countries overcome this difficulty. Members of the Union are Bangladesh, Bhutan, India, Iran, Nepal, Pakistan, Maldives, Myanmar and Sri Lanka. Trade between these countries, including imports of oil from Iran, was conducted through the ACU. Member countries did not have to maintain balances in New York banks for trade among themselves. They were required to pay to the ACU only the net balance after setting off transactions between them. The ACU works like the clearing house of banks in any city.

    In December, the Reserve Bank of India issued instructions that payments for imports of oil from Iran will no longer be made through the ACU. Reasons for issuing this order were not disclosed by the RBI. Analysts believe this was done at the behest of the United States. The reason seems to be that the ACU made it convenient for member countries to import oil from Iran rather than other countries. The United States wants to discourage this in order to subdue Iran. Therefore, the RBI, acting at the instance of the United States, has put a spanner in the pipeline.

    Iran, then, agreed to accept payment in rupees. This was wholly beneficial for India. Say, Indian Oil imports a barrel of oil from Iran valued at US $100. Previously, Indian Oil would deposit an amount of Rs 4,500 with the ACU being the value in rupees at an exchange rate of Rs 45 to a dollar. Iran suggested that Indian Oil can directly pay this amount in the account of Iran’s company in a bank at Mumbai. Iran would use this amount to import other goods from India or sell the currency to other countries. Such payment would not have any impact on Indian Oil whatsoever. This was beneficial for our economy as well. India imports goods from Iran valued at $12 billion a year against exports of only $1 billion. Rupee payments would encourage Iran to import more goods from India and reduce this trade imbalance. But the Reserve Bank has refused to accept this offer as well. The RBI has said that it would not be beneficial to make rupee payments in view of the large trade imbalance. This logic is not understandable. Rupee payments will only help reduce the imbalance.

    It may be that the RBI does not want to place huge amounts of Indian money in the hands of Iran. Iran could hold the money as reserves and use it to wreak havoc on our currency if relations sour in future. The United States is facing exactly such a threat from the Chinese holding of $1.4 trillion US dollars. I find this fear to be unfounded. We should aim for the rupee to become a global reserve currency.

    All countries of the world, including Iran and Pakistan will then hold huge amounts of Indian currency. Holding of rupee reserves by Iran should be seen as a first step towards globalisation of the rupee. Yet the RBI has declined this offer. Iran is upset. It has agreed to accept payments from Indian companies through the Iran-owned European-Iranian Trade Bank AG in Germany as a temporary measure for January 2011.

    Pressure of the United States appears to be working here again. The US has asked major US and European banks to reduce business with Iran. Some Iranian banks have been blacklisted by the US on the ground that they are involved in supporting terrorist and nuclear proliferation activities. The US is applying this pressure for two reasons. One is the alleged nuclear weapons programme of Iran. The other is use of non-dollar currencies by Iran for receiving payments of oil. Iran has been long making efforts to denominate its oil exports in a currency other than the US dollar.

    The dollar has been weakening since the onset of the global crisis in 2008. It is expected to decline further. Many countries are shifting their trade and foreign exchange reserves to other currencies. We need oil from Iran to ensure our oil security. We should not jeopardise our interests by getting unnecessarily entangled in America’s policies against Iran.
     
    Last edited: Jan 25, 2011
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  3. Yusuf

    Yusuf GUARDIAN Administrator

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    Such is the clout of the US that it can block almost anything in the world or grant access to anything in the world. I don't think the rupee can be a global reserve yet or in the near future till our economy is more bigger and also the currency more stable wrt other major currency. The rupee swings like a yoyo. The rupee is still not fully convertible. I think we may see the RMB become a reserve sooner than the rupee. may be sometime in the middle of this century we could see the rupee as an international currency.
     
  4. warriorextreme

    warriorextreme Senior Member Senior Member

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    how are we going to pay iran nearly 40000-50000 cr rupees(12 bl $)??
    wont it take a lot of time for trade to be balanced as our exports to Iran are mere 1 bl $(4000 cr rupees)
     
  5. Yusuf

    Yusuf GUARDIAN Administrator

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    China. That is the source of major imports for iran. That is why iran and china are working to adopt RMB as currency of trade if not already. Suits both countries fine. China is always going to do what the US does not want whereas india is not up there yet.
     
  6. warriorextreme

    warriorextreme Senior Member Senior Member

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    yes i agree and we should not jump into doing this so soon as most of our military import expenditures are through dollars.
     
  7. anoop_mig25

    anoop_mig25 Senior Member Senior Member

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    bloody hell Why on first place RBI stopped PAYMENTS FOR IRAN FORM ACU . this upa under led by Manmohan singh government is seriouslly toying every small order from usa. this going to cost us in future. i already see f-18 beging selected for MMRCA without any TOT full of strings attached to it.instead of making arrangements simplier this upa government is making life hell. instead of promoting IPI gas line we are supporting TAPI line. although i am not supporter of pipeplineany thing coming form pakistan(off course untill our relations improves ) . we cannot trust pakistan army blindly under usa influence
     
  8. thakur_ritesh

    thakur_ritesh Administrator Administrator

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    discuss only the technicalities and the economics behind rather than any other discussion, for rest please go to other threads. no further off topic posts in this thread, will be immediately deleted.

    thanks.
     
  9. p2prada

    p2prada Stars and Ambassadors Stars and Ambassadors

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    I think RBI is more interested in having a free reign to makes changes in the currency artificially than the reasons the article gave. That way RBI can pump as much money into GoI without having other countries cry foul like how many countries are protesting over Federal reserve's plan to dump $650Billion in the US economy.
     
  10. badguy2000

    badguy2000 Respected Member Senior Member

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    one global reserve can not be based on a yearly 500 billion USD trade.
     
  11. ejazr

    ejazr Stars and Ambassadors Stars and Ambassadors

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    Case for rupee trade with Dhaka

    New Delhi, April 19: When India’s commerce minister Anand Sharma calls on Bangladesh Prime Minister Sheikh Hasina next week to discuss a new trade deal, he won’t be talking about the possibility of trading in rupees.

    However, many Indian and Bangladeshi businessmen would welcome trade in the rupee instead of the volatile dollar with its attendant exchange risks.

    India sells some $2.5 billion of merchandise annually to Bangladesh and buys about one-tenth of that from its eastern neighbour, a trade imbalance which Sharma will try to address during his visit with promises of opening up to more duty free imports.

    Attiur Rahman, governor of the Bangladesh Bank, the coastal nation’s central banker, told The Telegraph that he would not rule out trade in rupees, “provided the currency became fully convertible”.

    For a currency to be acceptable globally by businesses and made part of reserves which central banks around the world buy and keep, it has to be normally fully convertible and stable against most major currencies.

    “Trade in local currencies with neighbouring countries would cut down forex risks and may be the way forward, but for the rupee to be acceptable in the wider world, convertibility would be a must,” said D.K. Joshi, chief economist of Crisil.

    Till June 6, 1966, the Indian currency was officially or unofficially the acceptable tender over a wide area from Beirut to Hong Kong. In 1966, India devalued the rupee, forcing itself out of global markets.

    Aden, Oman, Bahrain, Qatar, Trucial Gulf states (present day UAE), Tanganyika (former name for Tanzania), Uganda, Seychelles and Mauritius were among the nations where the rupee was legal tender. But the currency as global tender is now history and accepted only in neighbouring countries such as Nepal, Bhutan and Afghanistan.

    “The Chinese are doing trade deals in renminbi with many countries and we should do the same,” Joshi added.

    Though none of the Brics (Brazil, Russia, India, China and South Africa) countries have convertible currencies, they have agreed to their development banks opening lines of credit in their respective currencies for mutual trade.

    “Rice trade in rupee could cut out exchange risks and keep the business coming,” agreed D.N.Pathak, executive director of the All India Rice Exporters Association. Though official trade between India and Bangladesh was less than $3 billion, unofficial trade across the border — often by smugglers in medicines, cattle, rice and even eggs — was estimated at over $1.5 billion. This trade is carried out in rupee and taka (Bangladesh’s currency) without any foreign currency payments being involved.

    Many neighbours often trade in a robust local currency if that reduces exchange related risks and helps save scarce foreign exchange. However, in the case of India and Bangladesh, with both currencies being defined by its relative value to the dollar, the currency risk would hardly be reduced by converting the trade to rupees.

    Explained Matlub Hussein, chairman of diversified Nitol Nilay Group, which among other things assembles Tata trucks and vehicles in Bangladesh, “Unless we change the base (dollar), it won’t make sense but if we can do that then yes it’s a far better of way doing business.”
     

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