Sunday, January 3, 2010

Panel Discussion – Should Dollar be the Global Reserve Currency?

Why Yuan? Why not Euro....?? Euro seems to be a better pick than the Yuan...! But there is lack of unity among them. Well, then why not the IMF SDR’s...??! Hmm, seems to be complicated. Will the US Dollar continue....??!!!


Well, we the BFS students were working on this for over a week. Our first Panel discussion kicked off with a debate on whether the dollar should continue being the global reserve currency or should there be any other takers for the same. In the presence of our Chairman Mr. Mohan Menon, BFS Varsity head Mr. Sadashivam and our dean Mr. Sridar Natrajan, we argued why it should and why it shouldn’t. Charan, Dipesh and Benoy supported the dollar; while Priya, Shanmugapriya, Gourav and Sri Krishna Prasad were of the view that there has to be a new reserve currency.

The dollar has come under sharp criticism of late due to its volatility and the countries world over find it difficult to withstand the fluctuation in exchange rates. In this context, there is a hue and cry from some nations to replace the dollar with another currency as the global reserve currency. The supporting arguments for the dollar were:

1. Backup of the largest and strongest economy in the world.

2. Freely tradable and freely convertible currency.

3. Highly liquid and fully convertible for both capital account and current account purposes.

4. Despite the recession and the dollar volatility, economies still invest in dollar to accumulate their reserves.

5. Even the deficit of $120.3 billion dollar, works out to be only 0.8% of the country’s GDP. This reflects the depth of the economy inspite of the downturn.

The counter arguments for the dollar dominance were:

1. As the dollar is predominantly used world around, the fluctuations hurt other countries badly.

2. The gulf countries want a change to Euro or Chinese Yuan.

3. Russia too has joined the Euro supporting nations. It has reduced its reserve composition, which was substantially in dollar, to 45% Euro and 55% USD.

4. China wants the global reserve currency to be the IMF Special Drawing Rights (SDR’s).

5. China would be in a better bargaining position as they have $768 billion of US treasury bills as reserves.

They wanted the Chinese Yuan or the EU Euro to be the reserve currency. Chinese Yuan, according to them was a good contender, as it was the strongest growing economy and politically stable. This statement made some eye brows raise!

As the discussion picked up Mr. Sadashivam threw open a different angle to the discussion. What were the key characteristics for a currency to be the global reserve currency? - he asked, and guided us through some key points. The main features include- extremely transparent economic and political system; preferably a democratic system which should be a facilitator to the world. The economy should have strong domestic markets. The currency should be fully convertible both in terms of current account as well as capital accounts and it should be highly liquid too.

The issue on constraints of INR being the reserve currency was also discussed. INR has all the above mentioned features; however a deep probing threw more light on this. India does not have a strong international trade, unlike China. The Indian export segment should be strengthened and the government should take initiatives for this.

We finally arrived at a common consensus that the US Dollar will continue to have the dominant status owing to the strength of the economy and polity. However there is a possibility that it can lose its hegemony as the Euro can be treated as an alternate currency. Economies world around would want to balance their dollar holdings with that of the Euro. Even the Chinese Yuan, has the prospective contender, provided there are drastic changes in that country. Some areas which China should look into are: should be more transparent economy, address the convertibility of Yuan and moreover, they are a highly export oriented economy, especially to the USA. It has to develop its domestic markets rather than banking more on exports.

The session proceeded for a long time with the panel members enlightening us about varied issues from the current political and economic situation in India, to the Climate Change Conference in Copenhagen. Our enthusiasm has touched the roof after this wonderful session. There was fun, there was learning and there were wise men imparting wisdom. We eagerly look forward for the next session, to learn and to share.

Contributed by Benoy Paul, BFS Varsity, CBS Batch IV (2009-10)

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