The Reserve Bank of India (RBI) has joined the effort of chipping away at the dollar’s preeminent position as the world’s currency. The central bank called for inclusion of emerging market currencies as alternative reserve currencies to the dollar.
Delivering the 46th A D Shroff Memorial Lecture in Mumbai, RBI governor D Subbarao said that the dollar’s monopoly as a reserve currency had resulted in many countries facing a liquidity problem as foreign creditors and foreign investors turned risk averse. “Paradoxically, even as the US economy was in a downturn, and its central bank resorted to extraordinary quantitative easing, the dollar strengthened as a result of flight to safety,” Subbarao said.
The governor pointed out that one alternative was to have a menu of reserve currencies. “But this cannot happen by fiat. To be a serious contender as an alternative, a currency has to fulfill some exacting criteria. It has to be fully convertible and its exchange rate should be determined by market fundamentals; It should acquire a significant share in world trade; The currency issuing country should have liquid, open and large financial markets and also the policy credibility to inspire the confidence of potential investors. In short, the ‘exorbitant privilege’ of a reserve currency comes with an ‘exorbitant responsibility’,” he said.
According to the governor, another option of developing special drawing rights (SDRs) — an overdraft facility that countries have with the International Monetary Fund to get credit denominated in dollars, pounds, euro or the yen — is not a feasible option as SDRs would have to be automatically acceptable as a medium of payment in cross-border transactions, it should be freely tradeable and its price has to be determined by forces of demand and supply.
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