The Global Trade Research Initiative (GTRI), a think tank, on Sunday, commented that India should become a middle-income country and then push to make INR (rupee) a hard currency and till then it must promote the settlement of global trade in the local currency.
What is hard currency? It refers to a currency that is widely accepted around the world and is expected to remain stable over time. This term is often used to describe currencies that are readily exchangeable for goods, services, or other currencies in the global marketplace.
Hard currencies are generally characterized by stability, low inflation, and a strong and reliable government or central bank.
Common examples of hard currencies historically have included the U.S. Dollar (USD), Euro (EUR), British Pound (GBP), Swiss Franc (CHF), and Japanese Yen (JPY). These currencies are often used in international trade and finance due to the economic stability of the countries that issue them.
According to GTRI, transforming currency into a hard currency is a complex process that hinges on several pivotal factors. Some key factors that contribute to making a currency like the Indian Rupee (INR) a hard currency.
Economic Stability: A country with a stable and growing economy is more likely to have a hard currency. Factors such as low inflation, sustainable economic growth, and a stable financial system contribute to economic stability.
Low Inflation: Low and predictable inflation rates are crucial for maintaining the value of a currency. High inflation erodes the purchasing power of money and undermines confidence in the currency.
Fiscal Discipline: A government that practices fiscal discipline by managing its budget effectively, avoiding excessive debt, and maintaining a stable fiscal policy can contribute to a hard currency.
Political Stability: Political stability is important for investor confidence. Countries with stable governments and policies are generally seen as lower risk, making their currencies more attractive to international investors.
Strong Institutions: Strong and transparent institutions, including an independent central bank, contribute to confidence in the stability of a currency. An independent central bank can help maintain monetary policy credibility.
Foreign Exchange Reserves: Accumulating an adequate level of foreign exchange reserves provides a buffer against external shocks and helps stabilize the currency's value.
Trade Balance: A country with a consistent trade surplus is generally more likely to have a hard currency. A positive trade balance means that the country is exporting more than it is importing, resulting in a net inflow of foreign currency.
Global Demand: The global demand for a currency also plays a role. Currencies that are widely used in international trade and finance are more likely to be considered hard currencies.
Convertible Capital Account: Allowing a certain degree of convertibility of the capital account, meaning the ability for residents and non-residents to buy and sell financial assets across borders, can enhance the international use of a currency.
As per GTRI, the process requires significant systemic changes which could, potentially, destabilize India’s economy. Therefore, it might be more prudent for India to wait until its economy grows further and reaches a middle-income status before aspiring to make the INR a hard currency.
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