The Modi government’s strong diplomacy and efforts to strengthen the rupee by establishing it as an internationally recognised currency against the US dollar are positive developments. The rest of the globe is deeply concerned about America’s exploitation of emerging and impoverished countries’ currencies, which has caused several issues. India is a large importer, particularly of oil and gold, which hurts our currency and economy. We are bearing the brunt of it today because past Congress governments did not take the essential steps to limit oil imports. Despite the Modi government’s efforts to lessen dependence through the use of renewable energy and electric vehicles, imports will not be reduced immediately. The Modi government is working with the idea of “Nation first” rather than being pressured by economic superpowers, and all required actions are being made to strengthen the country in the socioeconomic domain, something past governments should have done a long time ago. In the next years, we shall see the good effects of the Modi government’s efforts to propel the country to the pinnacle of glory in all aspects, free of external pressures and foreign conspiracies.
BRICS countries’ strategy against the dollar
De-dollarization is the trade of currencies other than the US dollar. The BRICS nations, which originally included Brazil, Russia, India, China, and South Africa, are working together to construct a new reserve currency based on a basket of their various currencies. A hypothetical BRICS currency would allow these countries to show their economic independence while competing with the current global financial system. The current system is controlled by the United States dollar.
It is still difficult to anticipate when the BRICS currency will be published and used, but now is an excellent opportunity to consider its potential and the ramifications for investors.
How does international currency competition work and how does it affect us?
Currency competition is a sort of conflict between nations in which each attempts to promote exports by weakening its currency. Currency conflicts are often viewed as terrible for all nations involved. While India has never faced currency rivalry, we were tragically pushed into it when China purposefully depreciated the yuan in September 2015. As a result, most emerging nations have depreciated their currencies in order to maintain export competitiveness. India had no choice but to let the currency sink.
The US dollar has long been the world’s major reserve currency and the most commonly utilized currency in international trade. According to data on global currency reserves as of 2023-24, 44.15 percent are in dollars, 16.14 percent in euros, and around 8.40 percent in yen and 6.40 in pounds. These currencies primarily influence global business. The rupee’s internationalization can lower transaction costs for cross-border trade and investment by lowering currency rate risk. The depreciation of India’s currency not only raises the cost of imports in the country, but it also raises local prices through imported inflation. Rising oil prices and a falling currency proved a disastrous mix for India’s inflationary prospects in 2022, as the country has to import substantial volumes of oil to drive infrastructure, industry, the auto sector, and other critical commercial growth. The dollar’s strength against other currencies has made it impossible for many economies to cut inflation, and the situation is serious; yet, despite being such a vast country, the Modi administration has taken the required steps to manage inflation in comparison to other countries. India also has a significant trade imbalance, which means more money is spent on imports than on exports. Invoicing in rupees will limit dollar outflows, especially if the rupee depreciates against the US currency.
Why internationalisation of Indian rupee is so important?
The term ‘internationalisation’ refers to the rupee’s ability to be freely traded by both residents and non-residents, as well as its status as a reserve currency in global trade. This has allowed the rupee to be widely used for import and export trade, other current account transactions, and, lastly, capital account activity. Importers and exporters will profit from improved flexibility because they would no longer have to pay conversion fees or consider US dollar transfer pricing. Aside from that, Indian importers will be able to get cheap oil by paying in rupees. Since the start of the Russia-Ukraine conflict, India has emerged as a significant user of Russian oil. The Modi government is purchasing massive quantities of crude oil in rupees. It processes and sells it to European countries, so increasing its foreign exchange reserves. To guarantee a seamless and effective transition to the internationalisation of the Indian rupee, policymakers, market participants, and regulators must plan carefully and work together. The value of the Indian rupee, or any other currency, is determined by demand. When demand for a currency rises, its value rises; when demand falls, its value falls, a phenomenon known as devaluation.
As more overseas investors invest in India, the demand for the Indian currency rises. This is because international investors or businesses must first convert their currency into rupees before investing in India or purchasing Indian products, as they can only invest in rupees in the Indian market. As a result, demand for the Indian rupee rises, as does its value against the US dollar and other currencies. When Indian consumers and businesses import goods, they must pay in dollars (the real world currency). Because the US dollar is the currency utilized for international trade, Indians sell rupees to obtain dollars. As a result, demand for the dollar rises, and the rupee falls versus the US currency.
Foreign investors were pulling their assets from the Indian market following the US Fed’s announcement of interest rate hikes and the Russia-Ukraine conflict. When foreign investors remove their investments in India, they receive rupees. However, they must exchange their rupee holdings (into dollars). As a result, they will convert rupees to dollars and trade. As a result, demand for dollars rises, while demand for rupees falls. As a result, the Indian rupee weakens against the US dollar. It reveals a great deal about India’s bilateral, trilateral, and multilateral geopolitics and geoeconomics.
Although the rupee is a long way from becoming a reserve currency like the US dollar, this is a promising start. As more countries adopts their exports and imports in rupees, bilateral trade prospects with India will improve, while the rupee will rise.
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