May 18, 2010 / 2:35 PM / 9 years ago

UPDATE 1-India cbank study says yuan far from reserve-ready

* Yuan “far from ready” for reserve role: India cbank study

* Rupee internationalisation risks greater volatility-study

* Dollar unlikely to lose predominance any time soon-study (Updates with details, quotes)

By Swati Bhat

MUMBAI, May 18 (Reuters) - A more international role for the Indian rupee could expose it to significant volatility, while the Chinese yuan is “far from ready” to gain reserve currency status, a Reserve Bank of India study said on Tuesday.

Rather, it said China’s yuan was likely first to become a regional currency as trade links with its neighbours expand.

“However, India needs to take steps to increase the role of the Indian rupee in the region to catch up with the growing influence of the Chinese Renminbi,” the study said.

The rise of China and India, the two largest countries and fastest-growing economies, as more developed economies struggle to emerge from the global downturn has fuelled discussion about reform of the global monetary system.

The RBI report said the dollar was unlikely to lose its predominance as a global reserve currency any time soon.

India’s rupee is fully convertible on the current account but not on the capital account, and efforts to fully liberalise it were stalled in part by the global downturn. China, meanwhile, is under international pressure to increase the value of the yuan, which is pegged to the U.S. dollar.

“In view of the large current account deficit, the exchange rate of the rupee is susceptible to the debilitating influence of large capital movements, especially during crisis periods,” the RBI study said.

“Since the depth of the Indian financial market is relatively less, such volatile capital flows can impart significant volatility to the Indian rupee,” it said, warning of the dangers of hot money flowing into and out of the country.

Almost all of India’s trade is dollar-denominated, it said.

“The hallmark of any international currency is that invoicing of tradable goods between countries is done in internationalised currency,” the report said.

The global financial crisis eroded confidence in the U.S. dollar as a global reserve currency. Sovereign debt woes in the euro zone, meanwhile, have recently put the euro under pressure.

The report noted that sceptics believe China’s yuan, or renminbi, is far from global “safe haven” status because it is not convertible and its stability is partly due to its dollar peg.

To make the yuan an international currency, China would have to ease restrictions on flows in and out of the country, make its currency fully convertible for such transactions, continue with financial reforms and make its bond markets more liquid, the report said.

It also said that while it would take a long time before the yuan could become a reserve currency, such a possibility was not “totally unrealistic.”

For the entire study on the central bank's website click: here (Editing by Tony Munroe/Ruth Pitchford)

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