A brave new world for the rupee

There are always innovations and opportunities that arise from challenges. Many of the luminary companies of today were born during a financial crisis — Uber (2009), Microsoft (1975), Disney (1923), General Motors (1908) and General Electric (1890) to name just a few. The current geopolitical crisis may have just provided such a platform for countries, India included. The recent decision by Russia to benchmark the ruble to gold has opened up a Pandora’s box for the US dollar.

The dollar has been enjoying the position of a global reserve currency and this gained enormous prominence after the collapse of the Bretton Woods system. In the Bretton Woods system, the dollar was pegged to gold and all other currencies were pegged to the dollar. However, this meant that a time would have come when outstanding dollar liabilities would exceed the US monetary gold stock. Subsequently, the Bretton Woods was dismantled in the 1970s, and this resulted in the dollar capturing the position of a global reserve currency and the Fed printing dollars every time the world faced a crisis.

If we fast forward to the current situation, a recent International Monetary Fund report points to active diversification of currency holdings into non-traditional currencies. Russia, for example, was holding 21 per cent of its foreign exchange reserves in such currencies. In fact, most of the central banks were holding more than 10 per cent in non-traditional form. If we add to that the central banks’ gold holdings, with Russia holding another 21 per cent, clearly, there has already been an underlying trend of diversification (Russia is one of the top five gold mining and producing countries in the world).

In this context, there has been a lot of hue and cry about where India stands. It is important to point out that ONGC Videsh is currently holding a stake in most Russian oil companies, such as Sakhalin-1, Imperial Energy and Vankorneft, and, to that extent, India is actually getting its own oil back from Russia. Next is the payment mechanism. If both the Reserve Bank of India and the Central Bank of Russia come together and agree to peg the currency pair ruble/rupee (make it agnostic to exchange fluctuation), any bank with presence in both the countries can settle one currency against the receipt of another.

India should, therefore, continue to play to its strength to make the rupee a global tender. In the last few years, India has made enormous efforts in this direction. RuPay, a home-grown card payment network is a glorious example of that. Launched in 2012 through the National Payments Corporation of India, RuPay catapulted India into the league of nations that had digital payment capabilities. With the exception of China’s China Union Pay, India was the only country with a home-grown payment gateway in Asia.

Countries that encourage domestic cards have been observed to be faster in moving away from cash. India was a late entrant to the domestic card market. In 2017, the share of RuPay was only 15 per cent of the total cards issued in India. However, as of November 30, 2020, with about 603 million RuPay cards issued by more than 1,000 banks, the market share of RuPay has increased to more than 60 per cent, truly a commendable feat. A significant proportion of RuPay cards is in the nature of debit cards.

RuPay aims to empower every Indian with a world class payment solution. It started its international foray in Bhutan, achieved with the integration of the Bhutan Financial Switch with the National Financial Switch. RuPay has now tied up with other payment networks like the Union Pay (China), JCB (Japan), NETS (Singapore), BC Card (South Korea), Elo (Brazil) and DinaCard (Serbia), in addition to Discover and Diner Club, and has thus made its presence felt across 195 countries. Clearly, a home-grown network holds the potential to turbo-charge the rupee as a preferred currency option. Interestingly, the recent crisis in Sri Lanka might also provide an opportunity for India to establish its digital footprint in the island nation.

Simultaneously, India is also working on setting up an open network for digital commerce (ONDC) to democratise e-commerce. The ONDC is envisaged to provide alternatives to proprietary e-commerce sites and provide equal opportunities to all marketplace players. As UPI is to the digital payment domain, ONDC is expected to be for e-commerce in India. It is designed to facilitate merchants and consumers alike by breaking silos to form a single unified network, transforming all businesses from retail goods and food to mobility. With an open network like ONDC that connects buyers and sellers across platforms, even the offline retailers will be able to compete with online sellers, encouraging hyperlocal deliveries.

All of this means, firstly, we now have an indigenous card payment network poised to transform the presence of rupee as a medium of exchange across countries. Coupled with this, the introduction of digital currency by the RBI could ensure seamless remittance across boundaries. The ONDC has the potential to meet all the specifications to be a disruptor.

Perhaps the BRICs Bank can take this opportunity to be bolder and create a parallel currency to the tune of $1 trillion or so and allocate the money to member countries to keep as reserves or use in transactions. In the process, we could get a new bancor-based international monetary system that Keynes had proposed at the Bretton Woods Conference and that the UN system has been advocating in recent years.

The time is thus ripe for ending today’s unipolar world and moving to a truly broad-based multipolar world, with India playing a key role in the process.

In Open Secret of Economic Growth, David McCord Wright observes: “It is the spirit itself that builds the body”. Perhaps the time has come to believe in our inner strengths.  

Ghosh is group chief economic advisor, State Bank of India, and Chaudhuri is senior vice president, Datamatics Global Services. The views are personal.