Siddharth Roy
(siddharth01.roy@gmail.com)
Our Indian rupee is again being looked upon as an inferior currency compared to the US dollar. The Indian rupee in the global market has fallen to a record low against the US dollar recently. The future of the Indian rupee, according to experts, seems to be bullish and might cross 1 dollar equivalent to more than Rs 85. But reality seems a little bit different. Recently, our Finance Minister, Nirmala Sitharaman, said that the Indian rupee is not weakening. It is the US dollar that is strengthening in the global financial market, making the Indian rupee look weak. In the last decade, the Indian rupee has shown stability and, in some instances, has even strengthened when compared to other international currencies. And this is the reason why the Indian rupee is rising in acceptability globally, although it seems to be weakening in comparison to the US dollar. Now the question arises as to how the US dollar is getting stronger day by day.
The USA maintained its dominance in the global economy for almost 100 consecutive years, controlling most of the international transaction and global investment markets. Just like in India, the RBI controls the supply of rupees and inflation using monetary policy tools like repo rates and reverse repo rates; similarly, in the USA, the Federal Bank changes interest rates to maintain the demand and supply of dollars. In 2014, the interest rate of the US Federal Reserve was just 0.1%. This was done for better economic stimulation and an encouraging borrowing-investment cycle. At the same time, India and similar developing economies were offering higher returns, leading global investors to prefer investing in them over the USA. Then the COVID-19 pandemic hit, and global investors started investing in risk-free US dollars again due to their wide spread acceptability in the global financial market, although the return on investment (ROI) was lower. This, in turn, increased the global demand for the US dollar and made it stronger. But due to the lockdowns and economic stagnation caused by COVID-19, the US economy also began experiencing a recession. As soon as the lockdowns and restrictions were removed, the US Federal Bank printed dollars and injected them into their financial market to boost their economy. But due to the huge supply of currency in the market, the inflation rate boomed to around 9.1%. And to curb this booming inflation, the US Federal Reserve increased interest rates to a 22-year high of around 5.33%. This higher interest rate boosted the demand for the US dollar in the international market as investors started investing in the US for better returns. It is to be noted that the USA has become a superpower not because of its military might but due to the global acceptability of the US dollar, which is strengthening day by day in the global financial market.
If we sideline the unfair advantage of the US dollar, we can see that the Indian rupee is quite stable compared to other global currencies. Even some currencies, like the Japanese yen and the Australian dollar, decreased in value. The Japanese Yen decreased from 0.65 rupees to 0.56 rupees in 10 years, and the Australian dollar fell from 59 rupees to 53 rupees. Also, in comparison to the Brazilian currency Real and the Russian Ruble, the Indian Rupee became 65% and 123% stronger, respectively. So, we can see that in comparison to global currencies, the Indian rupee has remained either stable or has strengthened in value but didn’t weaken. India’s balance of trade is more tilted towards excessive imports, leading to a huge trade deficit of around $122 billion. And for settling the import trade bills, we need foreign currencies, especially the US dollar, further increasing the demand for the dollar in the market. So, we can see that rising import bills are also contributing to the strengthening of the US dollar in comparison to the Indian rupee. And so India needs to curb these increasing imports. Aatmanirbhar Bharat and the Make in India campaign are welcoming initiatives in this regard, making India self-reliant and relying less on imports. India is trying its best to break the monopoly of the US dollar in the global trade ecosystem and promote the use of the Indian rupee to settle trade bills.
The Indian rupee needs to be at the centre of this skewed global economic setup, where currently the US dollar is firmly holding its position. India has started moving along this path. To make a currency acceptable on a wide scale, it needs to be stable first globally, and India is achieving success in this regard. The recent RBI report is a testimony to this development. Even according to reports from Bloomberg, the Indian rupee is becoming the most preferred currency of exchange for Asian investors. India is trying to get the Indian rupee into the IMF’s Special Drawing Rights basket of currencies along with the US dollar, euro, Chinese renminbi, Japanese yen, and British pound sterling. The Indian government is also trying to increase the use of Indian rupees in international trade by promoting rupee trade settlement mechanisms. Our Finance Minister, Nirmala Sitharaman, said that India is in discussion with 22 countries about having their trade in the Indian rupee. Just a few months ago, about 18 countries had agreed to transact in rupees for bilateral trade with India. Also, India is trying to promote the use of the Indian rupee for trade among the BRICS nations as well as countries like Sri Lanka, Bangladesh, Nepal, Iran, Myanmar, and others. Recently, India paid in rupees for its oil trade with the UAE, which is a significant milestone towards the internationalisation of the Indian rupee. If the dominance of India in global trade and the world economy keeps on increasing, it will be just a matter of time before the Indian rupee takes centre stage in the global trade ecosystem.