In partnership with

Good morning. In today's edition — why India's pursuit of the rupee as a global reserve currency is a distraction from more pressing economic issues, a recap of India's improving forex reserves, news of impending price hikes from automakers, and an analysis of the rebound in FPI inflows.

THE TAKE

Why India Should Focus on Overall Economic Policy Certainty

In February 2021, almost four years ago, reports emerged that the internationalisation of the rupee was inevitable but would complicate the formulation of monetary policy. This was attributed to the Reserve Bank of India’s (RBI) report on currency and finance.

Internationalisation would mean that the rupee could be freely transacted by both residents and non-residents. And here’s the important part: it could be used as a reserve currency for global trade.

The RBI report also said that while this ideal world would lead to lower transaction costs of cross-border trade and investment operations by mitigating exchange rate risk, it would make the simultaneous pursuit of exchange rate stability and a domestically oriented monetary policy more challenging unless supported by large and deep domestic financial markets that could effectively absorb external shocks. 

It is not clear whether the RBI was advocating for internationalisation or just pointing out what it would take. Reading between the lines, I would conclude the RBI was assuming that the former was inevitable, to use its own words, and the latter, which is domestic monetary policy stability, was what we had to work on to ensure it worked well.

In short, several leaps of faith, at least as I could see.

The Reserve Bank has been careful to use the term “internationalisation” of the rupee, though it does appear that it is nothing but code for de-dollarisation because it largely means the same, practically speaking, at least.

In March 2023, another headline, or perhaps headlines, said the rupee was closer to replacing the dollar as 18 nations had agreed to trade in the INR. The article referred to a statement in Parliament by India’s union minister of state for finance, who, in turn, referred to a July 2022 circular from the central bank permitting invoicing international payments in rupees. He also said that the RBI had given approvals to several banks to open special rupee vostro accounts (SVRAs), which allowed for settling payments in rupees.

While the countries ranged from Singapore to Sri Lanka, Malaysia, and the Seychelles, the key one was obviously Russia, with whom India has purchased large amounts of crude oil in the last two years or more.

Russia, itself a pariah since it invaded Ukraine, has been floating all kinds of trial balloons on alternative currencies, including a BRICS currency last month. Which likely got US president-elect Donald Trump worked up.

To be fair, there is nothing wrong with aiming to create a currency reserve of your own, though there are problems when an idea gallops faster than strategic plans to ensure its arrival are made. That includes growing an economy to a certain scale and achieving the resultant economic might that goes with it.

Since no other country has done it, including China, whose GDP is almost five times India’s, it is fair to say or expect that nothing will happen in a hurry.

And when incoming President Donald Trump said he would slap a 100% tariff on countries who were dreaming of a BRICS currency, when the prospects for such a currency were in itself so far-fetched, it was interesting to see the reactions.

BRICS countries have no interest in weakening the US dollar at all, India’s foreign minister, S Jaishankar, said at an event in Qatar’s capital, Doha, on Saturday.

The RBI Governor, Shaktikanta Das, on Friday, while announcing his credit policy, said, “As far as India is concerned, the country has not taken any steps specifically aimed at de-dollarisation. All that we have done is permit the opening of Vostro accounts and enter into agreements with two countries by now to do local-currency-denominated trade. That is basically to de-risk our trade, since dependence on one currency can be problematic due to appreciation or depreciation.”

Well, to be fair to Das, he has never used the term “de-dollarisation” in the past either and has broadly held the same stance. But India’s almost abrupt leap to clarify is puzzling. If we had a position on the internationalisation of the rupee, however long a project it was, why take a visible step back?

Unless it’s all in the semantics, which is that we will pursue the internationalisation of the rupee but not de-dollarisation, which should keep you, the United States, happy.

Barry Eichengreen, Professor of Economics at UC Berkeley, writes in the Financial Times that the dollar will get stronger in the short term and then start getting weaker. He also projects that the Eurozone and China might allow their currencies to depreciate, which will increase their exports into other countries. 

Most of all, he argues that economic policy uncertainty has a strong negative effect on investment. “And Trump is an uncertainty machine,” he says.

So while we figure out where we want to take the rupee, it would be wise to remind ourselves that certainty in policy matters most when it comes to the entire spectrum of investment and economic activity. 

That would include hopes for creating a reserve currency.

MESSAGE FROM OUR PARTNER

Your daily AI dose

Mindstream is your one-stop shop for all things AI.

How good are we? Well, we become only the second ever newsletter (after the Hustle) to be acquired by HubSpot. Our small team of writers works hard to put out the most enjoyable and informative newsletter on AI around.

It’s completely free, and you’ll get a bunch of free AI resources when you subscribe.

Click here to subscribe

CORE NUMBER

Rs 1.22 lakh crore

This represents the total excise duty collected by the Centre from petroleum during the first half of FY25 (April to September). This amount marks a significant decline compared to the Rs 2.73 lakh crore collected in the entire FY24. The lower tax collection is attributed to reduced receipts from the windfall tax, a levy imposed on extraordinary profits made by companies or industries. Despite this fall in excise duty collection, fuel consumption in India, a proxy for oil demand, reached a record 157.53 million tonnes in the first eight months of the current year, indicating that the decline in tax collection is not due to lower oil demand.

FROM THE PERIPHERY

—⬆️ Consumers can expect to pay more for four-wheelers in 2025, from entry-level cars to high-end luxury models. Automakers are citing increased input costs and operational expenses as the primary reasons for the price increases, which are set to begin next month.  Several automakers have already announced price hikes effective January. Maruti Suzuki India plans to increase vehicle prices by up to 4% from January, while Hyundai Motor India is also looking to increase the prices of its model range by up to Rs 25,000 from January 1, 2025. Analysts also attribute the price increases to multiple factors, including a decline in profitability for several major automakers in the second quarter. 

—📈 Foreign portfolio investors (FPIs) have made net investments of Rs 24,454 crore in the first week of December. This is a welcome change after substantial selling in the previous two months. The new FPI inflows are likely due to stabilizing global conditions and potential US Federal Reserve rate cuts, as reported by PTI. In November, FPIs withdrew Rs 21,612 crore, and in October, they pulled out a record Rs 94,017 crore. Despite these fluctuations, with the latest inflow, FPI investments in India have reached a total of Rs 9,435 crore in 2024 so far.

—💸 A wave of Initial Public Offerings (IPOs) is set to hit India's primary market, with 11 companies, including Vishal Mega Mart, Sai Life Sciences, and One Mobikwik Systems, aiming to raise nearly Rs 18,500 crore in the coming week. These companies are tapping the market for various reasons including for providing exits to existing shareholders, business expansion, and for debt management. However, experts have cautioned that many IPOs can be driven by optimism about these companies' potential, leading to valuations that may appear inflated in the short term. Traders are more attracted to the lure of listing gains of many small businesses IPOs rather than focusing on fundamentals, which could lead to artificial price inflation, experts have warned in the past.

—👕 Apparel sales in India experienced a 5% year-on-year (YoY) growth in September 2024, a slower pace compared to the 9% growth YoY observed in September 2023, according to the Retailers Association of India (RAI). This lacklustre demand was attributed to selective consumer spending patterns, as consumers prioritize value-driven purchases, according to a Mint report. While a surprisingly warm November initially dampened winter apparel sales, the recent dip in temperature has revived demand, offering some relief to retailers, the report added. However, unpredictable weather patterns, particularly shorter and more intense winter seasons in North India, create challenges in inventory management in the apparel sector.

SUPPORT THE CORE

Dear Readers,

Some of you have written to us expressing your intent to contribute to The Core’s journalism. While we currently do not have a subscription or membership plan, you can still support us by clicking the link below.

Another way to support The Core is by sharing this newsletter with like-minded people in your communities, colleagues, friend and family.

Was this email forwarded to you? Subscribe