Though the ongoing crisis involving Iran’s nuclear weapons has consumed the minds of many international policymakers in recent weeks, the chill in the U.S.-India relationship has also become a key concern. Indeed, even the relatively close relationship between President Barack Obama and Prime Minister Manmohan Singh hasn’t been able to disguise the intractable geopolitical differences between India and the United States.
India, dependent on the Iran for nearly 12 percent of its oil supplies, refused to cooperate with sanctions and has continued trading with Tehran, to the chagrin of U.S. policymakers. However, through this crisis, Indian policymakers may have found the ideal moment to promote Indian power by ushering in the age of the rupee as a major regional currency.
Until now, India, like other countries has relied on dollars for international trade, including the purchase of petroleum products. As part of the deal to circumvent Washington’s sanctions, India agreed with Iran to pay part of its oil bill in rupees and other goods. The most recent sanctions all but cut off the complicated network of middle-men and banks that India had used to pay Iran. With a full commitment to use rupees instead, the moment to develop the infrastructure and capacity needed for a global market for rupees may have finally arrived. While this development has been long coming regionally, it will certainly speed up the process. Just last June, the Singapore Exchange announced that they would begin clearing out rupee denominated securities, a step signifying the currency’s gradual rise in importance. The Dubai Commodities and Gold Exchange, meanwhile, announced the creation of a rupee-denominated options contract last September.
The benefits of having a more global rupee would be twofold. First, a strengthened currency could help control the spiraling commodity costs that cripple Indian enterprise. Second, a global rupee would better represent South Asian economic trends on international financial markets, and at global institutions like the World Bank and International Monetary Fund. Larger businesses would have access to financial instruments, denominated in rupees, which reduce business risk and allow for more cross-border investment.
Of course, talk of an “internationalized” currency from a rising power is nothing new. Back in 2009, the governor of China’s central bank, Zhou Xiaochuan, advocated reducing the world’s dependency on the dollar by creating a new global currency. Since then, while laws regarding renminbi denominated securities have been eased, there are still many restrictions on investors trying to purchase them outside of China. As a result, major money funds have largely stayed away from Chinese securities. The Brazilian real had a similar moment during the “currency war” of 2010, but since then, interest has largely cooled because of the jitters surrounding the European debt crisis.
India’s move into globalizing the rupee could be a smart move for policymakers, and certainly one step in the right direction if they are trying to develop the country’s economic power within the Middle East, South and South East Asia. To this extent, India has several advantages. A large expatriate population in the region can encourage the trading of rupees through existing enterprises and through remittances. For countries such as Burma that are edging away from Chinese power, India’s use of a bilateral trading relationship based around rupee-denominated trade could be the key to promoting enterprise in both countries, and economic growth.
A second method could be through the use of India’s burgeoning aid apparatus. Just as China has actively encouraged the use of the renminbi within countries receiving its development aid monies (such as Zambia), India must promote the rupee within its recipient countries.
The current international climate is providing a watershed moment for policymakers and the financial industry to build the infrastructure needed to develop a regional trading market based around the rupee. It’s to New Delhi’s advantage to not ignore it.
Kedar Pavgi is an international relations analyst and journalist based out of Washington D.C. He blogs on his site The Couch Economist and for the Foreign Policy Association. You can follow him on Twitter@KedarPavgi.