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 Iranâ€™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 Americaâ€™s policies against Iran.