Indian Rupee Index: Is it a possibility? By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

May 26, 2015 | Posted by bobbysrinivasan << back to blog

Before we get to the topic, a short lesson in the global financial history seems relevant. On August 15, 1971 Richard Nixon, the President of the US announced delinking gold with dollar as their treasury did not have enough gold to back up the value of the dollar. Now, the global financial system is running on trust. Along with the US dollar several other currencies such as the Japanese Yen, Swiss Franc, Canadian Dollar, Pound, Sterling, Euro and Australian Dollar have become the major reserve currencies of the world. Every country in the world has a forex reserve which basically includes gold and any of these currencies. Currently 62% of international currency assets are in US dollars, 23% in Euros and 4% each in Yen as well as in Sterling. In October 2015, the IMF will conduct five yearly reviews of major reserve currencies.

Currently the Indian forex strategy involves rising US dollar proportion to 67%, Euro 22%. This has to change. The new entrant in our currency reserve should be Chinese Yuan, since all currencies are fiat by nature with nothing to back them. It will be a good idea for India to diversify. India currently has 5.5% of its reserve in gold. This should move up substantially to even 25%. The US has 60 trillion dollar debt in their economy. Sooner or later the bubble is going to burst. Then the gainers will definitely be gold and Chinese Yuan. The euro is a sinking currency and along with the US dollar our exposure should be reduced. What this blog is suggesting is that our forex reserves should have atleast 25% gold, 40% US dollar, 10% Euro and 25% Yuan. This will assure us lesser volatility especially if and when the US dollar faces uncertainty.

Similar to the US dollar index, India should contemplate on constructing its own index and allow it to be traded in the global market. The US dollar index is the index of the value of the US dollar relative to a basket of currencies often referred to as a basket of US trade partner currencies. It is a weighted geometric mean of the dollars relative value to other select currencies.

Euro 57.6% weight

Yen 13.6% weight

Pound 11.9% weight

Canadian dollar 9.1% weight

Swedish Krona 4.2% weight

Swiss Franc 3.6% weight

The US dollar index goes up when the US dollar gains against these currencies.

This blog suggests creation of a rupee index similar to the US dollar index. First we need to identify all our trading partners’ currency and weigh them according to the size and level of trade with them. What then is the advantage of creating such an index? They are as follows,

We can list the index in the Chicago Mercantile Exchange. Those who have exposure to the Indian markets could use this instrument as a vehicle to hedge.
Better price discovery for the value of rupee.
Possibly lower imported inflation.

Currently USA, China, UAE, Saudi Arabia and Germany are identified as our major trading partners. By assigning appropriate weightage to them we can develop an Indian rupee index. Then the value of rupee will be influenced not only by the US dollar value against it but the other trading partner currencies as well.

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