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India Mulling Rupee to Make Overdue Oil Payments to Iran

Service : Economy
TEHRAN, July 11 (ICANA) – The Indian finance ministry is considering the option of allowing the buyers of Iranian crude to open letters of credit in rupee terms which can be used by Iran to purchase Indian goods, mainly tea, machinery and engineering services, reports said.
Monday, July 11, 2011 10:12:45 PM
India Mulling Rupee to Make Overdue Oil Payments to Iran

The move opens up the possibility for New Delhi to strengthen the baby steps taken towards globalizing the rupee.

The excess left with Iran, however, will have to be converted to other liquid currencies such as the euro as India does not want any foreign nation to hold huge stocks of idle rupees.

If the deal goes through, it will be the first tentative move towards making the rupee an international currency. The likelihood of trading with Iran using the rupee grew more after payments in euros through the Asian Clearing Union was stopped by the US and European sanctions.

With growing trade relations, globalization of the rupee is a matter of time. More and more traders and bankers in financial hubs such as London, Dubai and Singapore are dealing in derivative contracts in the rupee.

The rupee accounts for nearly 1 per cent of the daily turnover of the global foreign exchange market compared with over 80 per cent for the dollar. Though China's renminbi accounts for just 0.3 per cent of the trade, it is being increasingly seen as a near global currency.

According to reports, the Sri Lankan Central Bank's Monetary Board, which earlier this month decided to include the renminbi in the list of designated currencies permitted for international transactions through its banks, is considering placing the Indian currency on the list.

The Indian Reserve Bank has prepared an academic paper that suggests that rupee convertibility can happen at some stage. "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 RBI study said.

Many, however, feel India should consider more aggressive steps to promote trade in its currency. D.K.Joshi, chief economist of Crisil, said, "The Chinese are doing trade deals in renminbi with many countries and we should do the same."

Since 2007, Iran, the world's fourth largest oil producer, has shifted from the US dollar to euro and yen as currencies in which it trades its crude products, a move seen by economic and political analysts as a major blow to the US dollar as a reserve currency.

Iran's move may be determined partly because of its ongoing political standoff with the US. However, that need not be the only consideration to have prompted Iran to shift to the euro and yen. Many oil exporting nations, as indeed other emerging economies accumulating dollar reserves, have been worrying about the structural weaknesses in the US economy and the prospect of the dollar's long-term decline.

Economists in the US too have voiced such concerns. So a gradual shift away from the dollar assets held by the rest of the world should not come as a surprise. A survey by the US treasury department measured foreign holdings of US securities as of June 30, 2007, to be $9,772 billion. This should easily cross $10 trillion this year, which is about 75% of the US GDP. Of this, $3,130 billion is held in US equities, $6,007 billion in US long-term debt securities, and $635 billion in US short-term debt securities. Mind you, the outstanding foreign holdings in US securities are growing on an average at over 25% in recent years.

Emerging economies are beginning to feel uncomfortable about putting so much in US dollar-denominated assets year after year. Oil exporting countries themselves have about half a trillion dollars worth of US securities today. By designating oil trading in euro and yen, Iran is clearly diversifying its assets by denominating them in currencies other than the dollar.

If other West Asian oil exporters were to do the same, the US or any other net oil importer, will be forced to buy euro and yen to purchase oil from the international market. The power of the US dollar as a reserve currency will certainly fall, to that extent. Indeed, nations holding US dollar assets will have to evolve new strategies to protect the value of their forex reserves as the axis of global economic power shifts rapidly. The United States and its allies would not want the dollar to suffer a precipitous decline as it would erode everyone's asset value. But they must all prepare for a gradual decline, for sure.

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