Time To Revisit Hegde’s Call To Find An Alternative Currency To The US Dollar

Last month, European Commission president Jean-Claude Juncker, in his “State of the Union” speech to members of the European Parliament, proposed the euro as a reserve currency against the United States (US) dollar. Juncker said Europe should unite to protect its interests, and has vowed to turn the euro into a rival to the dollar.

Juncker’s isn’t the lone voice. In March this year, China launched what is known as petro-yuan or crude oil futures contracts, based on its currency on the Shanghai International Energy Exchange to take on the US dollar. In June, the contracts registered a record trading of 137,503 lots for delivery in September. The petro-yuan hasn’t really set the crude oil market on fire as it collects a higher storage charge, though traders find it beneficial to trade Middle-East grades.

Writing in Dukascopy, Victoria Cromberg says 60 per cent of global foreign currency reserves are held in dollars, though changes are on the horizon. Some of the biggest economies are entering into agreements to move away from the US dollar in global trade. Giving reasons for a likely end to the greenback’s dominance as the world reserve currency, she says China, Japan and, most importantly, BRICS (an acronym for an association of major emerging economies—Brazil, Russia, India, China, and South Africa) plan to use their own currency for international trade.

Though efforts are being made to keep the US dollar on a leash, this year the greenback has had a good run against many currencies, notably the Indian rupee, Russian rouble, Brazilian real, and Australian and New Zealand dollars. The US dollar has gained nearly 13 per cent against the Indian rupee, which has sent India’s financial plans for a toss. India’s problems are that it depends on commodities like crude oil, cooking oil, gold, gems and jewellery, capital goods, and mines and ores that make up a major chunk of imports traded in the US dollar. Any depreciation in the rupee hurts trade balance and, in turn, the current account deficit.

India’s current woes are in view of rising crude oil prices, which are, in turn, putting pressure on its currency. On 15 October, Prime Minister Narendra Modi held a meeting with heads of oil and gas companies. He requested the companies to review the terms of payment to provide relief to the rupee. In other words, Modi was asking the oil companies to look at accepting payments in rupees. During the US sanctions against Iran, and, when India was allowed to go ahead with the oil-for-food programme, a part of the payment to Tehran was made in euros.

Then, there are issues like exporters having to review their offer prices since they now stand to gain from the rupee’s weakness. Importers, on the other hand, have to shell out more, creating uncertainty among business houses and industries. All these demand some sort of certainty in business climate and currency movements.

In fact, before Juncker, our own Ramakrishna Hegde had mooted a currency as an alternative to the US dollar. In 1997, speaking at an event in Singapore to commemorate the golden jubilee of India’s independence, Hegde, who was the commerce minister in Atal Bihari Vajpayee’s cabinet, said Asian countries should try to come out with a currency that can replace the US dollar. At that time, the rupee was hovering around levels of 45 against the dollar.

Hegde, in fact, followed up his words with action, exploring various avenues to avoid trading in dollars. For example, India executed a railway project in Malaysia through RITES and got paid in palm oil. There were negotiations with Indonesia for barter trade. India was to buy palm oil and teak wood from Jakarta and, in return, provide pharmaceutical products and commodities like wheat and sugar. The talks fell through since both countries could not come to an agreement on opening an escrow account, probably in Singapore. India’s view, then, was that it wasn’t comfortable with the credibility of the then government in Jakarta.

Views are aplenty on how to arrive at a currency to replace the dollar. How will its value be derived? One of the suggestions put forth was to look at gold’s value and come up with a currency to reflect that. Technology has made such rapid strides that, today, we can use cryptocurrency. India is among the countries that doesn’t favour cryptocurrency as yet. But there is nothing wrong in looking at options to find a fair value for its currency and a way out to ensure some balance. Of course, hedging is one way of protecting you against uncertainties in the financial world. We are witnessing only one-way traffic while dealing with the dollar as its value seems to be on the rise every passing day. What, then, can be a counter move?

Certainly nothing wrong if Hegde’s proposal is dusted off the shelf and looked anew.