The Aakhya Weekly #23 | The Rupee Goes International!
The Aakhya Weekly #23 | The Rupee Goes International!
In Focus: Internationalisation of the Rupee
Many have noted, with great dismay, the recent fall of the Rupee against the US Dollar. Why do we care so very much for the US Dollar, though? Why not the Pound, the Euro or the Yuan? To understand this, we must start at the very beginning, at where money gets its value.
Not very long ago, a nation’s currency depended on the amount of gold it held. Until 1931, for instance, if you held a British Pound, you notionally had a claim on one Pound’s worth of gold that the British government held on your behalf. When countries traded with one another, exchange rates were determined by how much gold the currency could buy. In the alternative, countries could simply make purchases in gold.
The world wars threw this system in disarray. The United States supplied the world with weapons and other material, and in return, the world gave the United States much of their gold. With heavily depleted gold reserves, however, countries could no longer continue to base the value of their currencies on gold. And so, many countries fell off the gold-backed currency system. They instead moved to a ‘fiat system’, where currencies would be used for trade because the government said so.
What, now, gave money real value? To make sense of the madness, in 1944, much of the world agreed that the value of their currency would be linked to that of the Dollar. The value of the Dollar, in turn, was linked to the gold that the United States held - at a fixed rate of $35 per ounce. Countries’ central banks started accumulating Dollars in massive volumes, which could, in principle, be exchanged with the United States for gold. The Dollar had become the “reserve currency” of the world.
In 1973, however, responding to rising demand by other countries for gold, the United States itself moved away from gold. Suddenly, there was nothing physical that ultimately gave money its value. The exchange of currencies between countries became a game of demand-and-supply. How much was your currency worth? The answer depended on how much other countries wanted it, and how much of it was available to buy.
The sheer heft of the American economy and global trust in the stability of its institutions continues keeps the Dollar in an enviable position, despite abandoning gold. In effect, it remains the reserve currency of the world; most central banks hold US Dollars in considerable volumes. Most international trade in the world is paid for in Dollars. As a result, the US Dollar is always in demand.
This is, in part, why the Rupee (and various other countries’ currencies) has been falling against the Dollar. With the onset of the Russia-Ukraine war, many commodities have evaporated from the market, driving up prices. Countries now need more Dollars to import goods, driving up demand for the currency. At the same time, the policies of the United States Federal Reserve are pulling away Dollars from global supply.
Off late, however, trust in the Dollar has eroded. The United States is using its financial strength as a tool of geo-political strategy, freezing the entirety of Russia’s US foreign exchange. The United States has also used sanctions to exclude various countries from international trade, pushing themselves to look for trading blocks that are insulated from the United States. Importantly for an energy-starved country like India, many of the countries that have earned the ire of the United States are major oil producers.
And so, India has embarked on a project of taking the Rupee international. In July, the RBI had set up a framework for international trade settlement in Rupees. Last week, the Ministry of Commerce and Industry amended its foreign trade policy, to permit the settlement of international trade in rupees for its export promotion schemes. India is also attempting to create a digital currency, as this newsletter has previously covered, which will improve the Rupee’s efficiency as an international currency, making it more attractive as a medium for international trade.
Should India succeed, it will gain three important advantages. One, it creates international demand for the Rupee, helping it fend off foreign exchange pressures. Two, it facilitates trade with countries that the United States has dubbed international pariahs, many of whom are rich in the very resources India needs. Three, it creates a mechanism that reduces India’s vulnerability, should the United States subject it to the types of measures that other countries have been subject to.
Nascent interest has started to trickle in. Nine Russian banks have recently opened “vostro accounts”, which are fundamental for international trade, in Indian banks. While this is, by no means, a challenge to the global hegemony of the Dollar, it may well be one of the earliest signs of a change to come.
Investopedia has a handy summary on the US Dollar’s journey to being the reserve currency of the world. The Wire, in March, wrote about the declining relevance of the dollar. The Carnegie Endowment for International Peace explores the implications of moving away from the dollar. Capitalmind carries an excellent primer on how international trade works, and the impact that Rupee-denominated international trade can have. The WEF recaps the importance of CBDCs for international trade.
Tracking the G20
Prime Minister Modi landed in Bali, Indonesia on Monday, 16th November for the 17th G20 Summit. As supply chains globally suffer from the aftermath of the Covid crisis, the PM did not hold back criticism of multilateral institutions in failing to act to keep prices of essential commodities in check. At a session on Energy and Food Security on Tuesday, he remarked:
“we should also not hesitate to acknowledge that multilateral institutions such as the UN have been unsuccessful on these issues. And we have all failed to make suitable reforms in them. Therefore, today the world has greater expectations from the G-20, the relevance of our group has become more significant”.
He also took the opportunity to forcefully emphasise that India does not support restrictions on energy supply.
“India's energy-security is also important for global growth, as it is the world's fastest growing economy. We must not promote any restrictions on the supply of energy and stability in the energy market should be ensured.”
On Wednesday, Indonesian President Joko Widodo formally handed over the G20 presidency to PM Modi. In his closing remarks later in the day, Modi once again emphasised the broad themes outlined in his opening speech, assuring that “India's G-20 presidency will be inclusive, ambitious, decisive, and action-oriented”.
Top Stories of the Week
India’s first private rocket set to launch on November 18
The Indian Space Research Organisation (ISRO) has signed a Memorandum of Understanding with various companies to assist them with space technology and build processes from the ground up in different domains of the space sector. A Hyderabad-based startup, Skyroot Aerospace was the first to do so. Established in June 2018, it is pioneering India's first privately developed space launch vehicle. The development of the rocket, Vikram-S, took about two years using carbon composite structures and 3D-printed components and eventually received technical clearance from IN-SPACe, which was set up under the Department of Space to boost the private sector space economy. Powered by the Kalam 80 propulsion system, Vikram-S is a scaled down version of the multi-stage Vikram-1 rocket.
Under mission 'Prarambh', Vikram-S is set to launch into space on November 18 during a launch window between 11:00-12:00 hrs from the launch facility at Satish Dhawan Space Centre in Sriharikota. It will climb to an altitude of 120 kms above Earth's surface to cross the Karman line, an imaginary boundary where space begins.
Big data: MeitY looking to set up National Government Cloud
According to sources at the Ministry of Electronics and Information Technology (MeitY), it is believed that the renewed legislative framework for data protection is in its final draft stage and will be tabled soon. It is expected that a draft bill will be released for public comments in the month of November or December. It is also expected that the final legislation will be introduced in the Parliament in the Budget session of the upcoming year (i.e., February 2023).
Additionally, MeitY is also looking to set up a data localisation regime for government and defence data by setting up a “National Government Cloud” (NGC) for its storage. The Government has also issued a request for proposal (RFP) to assist with the establishment of multiple hyper scale data centres across India. This is the first step towards a data localisation regime in India. While the Government has also announced its intention to do away with data localisation requirements for certain “trusted geographies”, the final text of the Bill, once published for consultation, will determine the precise regulations over data localisation.
This Week in Policy
Economy and Taxation
Industrial activity grew by 3.1% in the month of September, as per Index of Industrial Production data released by the National Statistical Office. The mining and electricity sectors led this spurt, while manufacturing dragged, showed the low growth of 1.8%.
India’s trade deficit for the month of October grew to $26.91 billion, from $25.71 billion in the preceding month. The month saw a fall in both, exports - for the first time in two years - and imports from September. Key export sectors, including gems, engineering, textiles, chemicals and pharmaceuticals, saw negative growth in the month.
Retail inflation in India fell to 6.77% in October, easing below 7% for the first time in three months. October, however, marks the tenth consecutive month that inflation has been above RBI’s ceiling of 6%.
Labour
Workers from across the country convened in Delhi’s Ramlila Maidan, demanding the withdrawal of the four labour codes. The protest rally was organised by the Mazdoor Adhikar Sangharsh Abhiyaan.
Agriculture and FMCG
Wheat planting gathers momentum with over 4.5 million hectares planted thus far, an acreage increase of nearly 10% YoY.
Healthcare
34 life-saving drugs have been included in the National List of Essential Medicines, bringing them under a price control regime supervised by the National Pharmaceuticals Pricing Authority. Meanwhile, 26 drugs, including Ranitidine, Atenolol and Methyldopa, have been removed from the list.
The West Bengal government has launched a mental health tele-medicine service, “Tele-Manas”, in order to assist persons with mental health difficulties.
Foreign affairs
China has appointed Sun Weidong, former PRC envoy to India, as Vice Foreign Minister, who is likely to head India affairs in the Chinese Government.
Technology, Media and Telecommunications
An Interministerial Task Force (IMTF) set up by MeitY has recommended a new central law to govern online gaming, as the Ministry considers the current legislation (the Public Gambling Act, 1867) unsuited to the task, being a pre-internet era law.
As part of its latest efforts to address the issue of SIM swap fraud, the Department of Telecommunications (DoT) has directed telcos to bar SMS facility (both incoming and outgoing) on new SIM cards for 24 hours after activation.
International trade and commerce
The International Trade Fair is being held in Pragati Maidan in New Delhi from 14 to 27 November, with over 2,500 global exhibitors and with overseas participation from 12 countries.
The India-Kosovo Commerce and Economic Office has been inaugurated in New Delhi.
Banking, Finance and Insurance
RBI ropes in five banks for beta-testing the digital rupee for retail transactions as it weighs whether to build a new framework for its digital currency, or make retail CBDC interoperable with the current digital payments system
Sebi expected to launch cyber security framework for stock brokers to reduce the impact of potential risks by cyber fraud, data leaks and hacking of trading accounts.
Manufacturing
The International Semiconductor Consortium’s proposed $3 billion chip manufacturing facility in Mysuru is likely to start construction as early as February. This would make Karnataka the first state to have a chip fab.
The Centre is working towards a new production-linked incentive (PLI) scheme to encourage container manufacturing in India.
Retail and e-commerce
Confederation of All India Traders (CAIT) is set to launch its e-commerce marketplace, Bharat eMart across the country, allowing traders to set up their e-shops on the portal.
India's retail inflation eased sharply to 6.77% in October as opposed to 7.41% in September 2022.
Logistics and Infrastructure
Prime Minister Modi flagged off the Chennai-Mysuru Vande Bharat Express at Kranthiveera Sangolli Rayanna (KSR) railway station in Bengaluru on November 11. The first of its kind, it is said to enhance connectivity between the industrial, tech and startup hubs of Chennai, Bengaluru and Mysuru.
The Uttar Pradesh government has successfully acquired almost 95 percent of the land required for the mega 595-km Ganga Expressway project. Post its completion, the state will have nine access-controlled expressways.
Sustainability
In accordance with the Green Open Access Rules, 2022, Ministry of Power and MNRE launch the Green Energy Open Access portal, lowering minimum load limit from 1000 kW to 100 kW.
India Submits its Long-Term Low Emission Development Strategy to UNFCCC, focusing on energy security as well as ensuring a just transition to a low carbon economy.
Upcoming Events
National Circular Economy Symposium 2022
November 24-25 | FICCI Federation House, New Delhi
FICCI is organising the sixth edition of National Circular Economy Symposium 2022 on November 24-25 at the FICCI Federation House, New Delhi. This year’s theme is theme “Accelerating Circular Economy for Sustainable and Inclusive Growth” with focus on the Indian ecosystem. e symposium is focused on addressing all the aspects to drive forward an inclusive circular economy agenda and promote a transition to circular economic models. The deliberations will touch upon role of circularity in achieving Net Zero, Circular financing and green investment as key enablers, policy imperatives to drive circularity, role of digitalization, and global best practices, among others. More Information | Registration Link
PM Gati Shakti Conference
November 24 | PHD House, New Delhi
PhD Chamber of Commerce is organising a conference on National Logistics Policy: Pathway for enhanced efficiency and comprehensive development on November 24th at PHD House, New Delhi. The event will focus on creating a platform for stakeholders in the ports, shipping & waterways, air cargo, and national gas pipeline ecosystems to exchange ideas and network. Shri Sarbananda Sonowal, the Minister for Ports Shipping and Waterways will be the chief guest for the event. More Information | Registration Link
PM Gati Shakti Multimodal Maritime Summit 2022
November 23-24 | Oberoi Grand, Kolkata
FICCI is organising PM Gati Shakti Multimodal Maritime Summit 2022 on November 23-24 at Hotel Oberoi Grand, Kolkata. The two-day summit will emphasize on road-rail connectivity to ports, opportunities in Inland Waterways, Syama Prasad Mookerjee Port’s Masterplan- 2047. The summit aims to bring greater awareness about the PM Gati Shakti National Masterplan and highlight its objectives amongst the relevant stakeholders. More Information.
A Few Good Reads
Mario Gabriele delivers a beautifully written piece on the crypto industry in the aftermath of the FTX saga.
Julia DeWahl does a deep dive on nuclear energy, the opportunities it presents and the challenges it faces.
Gig workers are creating tools of their own to understand and push back against algorithms. Varsha Bansal gives one a glimpse into these efforts.
Last week, we had recommended Adam Tooze’s piece, arguing that we are in the throes of a ‘polycrisis’. Noah Smith pushes back with the glass-half-full version.
Pratap Bhanu Mehta digs into the optimistic and pessimistic cases for India’s economic prospects, preaching agnosticism instead.
Tweets of the Week
Dharmesh Ba visualises income distribution in India:
The United States and China are both foisting their strategy vis-a-vis each other externally, with other countries caught in the cross-fire. See this fantastic explanation for more:
Amul amplifies the G20!
Key Notifications
MNRE releases a draft Request for Selection (RfS) document for selection of Offshore Wind power developers for allocation of sea-bed lease rights for projects off the coast of Tamil Nadu.
Uttar Pradesh releases its draft Green Hydrogen Policy, 2022. Comments can be emailed to ho_rak@rediffmail.com