#dnaEdit: Reign of the Rupee

Can India borrow internationally in its own currency, the Rupee? That is ambitious thinking indeed. If this were to happen, it will mark the arrival of India as one of the top world economies, in the same league as the United States, China, Japan and Germany. India has managed to raise rupee loans abroad through International Finance Corporation for investment in the country. Reserve Bank of India executive director G Padmanabhan has described it as a “heartening” development.  

It would indeed be ideal if every country were to use its own currency for international transactions. But in the post-Second World War period, as the United States emerged as the dominant economy, it was the US dollar that became the global reserve currency. But other strong economies were also in a position to do business with their own currencies. China has internationalised its currency, so that it can use yuan in its international transactions. India would be tempted to do so as well because it is emerging as a large economy, and its economy is expected to surpass in size the economies of Japan and Germany by 2019.  

The use of Rupee in global transactions is tied up with the issue of capital account convertibility (CAC), though they are two distinct issues as Padmanabhan had admitted. The free flow of capital into and from the country will have to be formalised. Is India in a position to go for CAC? It is a question that has been coming up ever since India adopted economic reforms in 1991. In the 1990s, it was seen as a distant but desirable goal of the Indian free market economy. But even hardened free-market economists are not too sure that it is an ideal way of boosting economic growth. Jagdish Bhagwati, the Columbia University professor of economics, who has been vocal about economic reforms, is not so sanguine about CAC. Experts cite his influential paper where he argued that Japan and China had attained the heights of economic growth despite controls on capital being in place.

The question of CAC is back in the news because two top Reserve Bank of India officials have broached it in a non-official context. RBI Governor Raghuram Rajan was apparently responding to a question from a student and said that there is no escaping from CAC in the long term. RBI executive director G Padmanabhan delivering a lecture at a management institute dwelt at length on the subject and came to the tentative conclusion that CAC is good and inevitable in the long term, but its materialisation would depends on macroeconomic criteria like “fiscal prudence and low inflation”.

It would not be surprising if Prime Minister Narendra Modi and finance minister Arun Jaitley want to take the bold decision of allowing CAC. This could be a way of fulfilling the government’s promise of improving “ease of doing business” in India. But as of now, it is going to be some time before a serious move can be made on CAC. 

This will not prevent India from raising rupee loans abroad to the extent that it can. If India is considered as an attractive investment destination, the strength of the rupee as a currency will improve as well. The internationalising of the rupee as well as capital account convertibility will be possible only if the Indian economy performs well and consistently. India is at the take-off point, but it is yet to reach the sustained growth stage. Quite clearly, the goals of rupee as a global currency and CAC are  not on the immediate anvil.