Factors Helpful to Make a Currency

International
 Gross Domestic Product (GDP) : For becoming an international currency, size of local
economy should large. Because only then the currency and economy will be important for the
world. Indian economy is one of the emerging economies of the world.

Year GDP’S Growth Rate

2019 5.02% In the past 5 years the growth rate was quite
2018 6.12% low. So, if the GDP is able to grow at a rate
equal to past, then it will help rupee to become
2017 7.04%
international currency.
2016 8.26%
2015 8.00%
 Large share in world trade: Economy’s share in world trade should be large. India’s
share in the world trade is very less. So, India is not currently trading in trade.

GOODS SERVICES
YEAR EXPORT IMPORT EXPORT IMPORT

2019
2018 1.7% 2.6% 3.5% 3.2%
2017 2.1% 2.6% 2.1% 2.6%
2016
2015 1.6% 3.3%
 Developed money and financial market: It includes size and depth of market,
disclosure and supervision etc. These factors are considered as structure factors. ECB
(2009) gave India 92 score for disclosure, 67 for supervision, 53 for access to equity, and
79 for market sophistication out of 100. So, India’s financial and reporting system is quite
developed.
 Confidence in Currency: People’s confidence (especially non-resident) in a currency
depends on its volatility. People have more confidence in a less volatile currency.
Volatility depends on inflation, current account deficit and fiscal deficit. All of these are
the main problems of Indian economy. Because of this people has less confidence in
rupee.
 Openness of Economy: For an international currency, economy should be opened. Non-
resident should allow for invest in assets and securities in local currency and resident
should allowed to hold assets outside the country. Currency should liquid so that it is
available to non-resident when needed. Indian rupee is not fully convertible currency.
Capital account convertible is not fully allowed in India. This is also a restriction in
making rupee as an international currency.
 Transaction Cost of a Currency: A currency which is often used for international
transactions, have lower cost in transaction because there are many sellers and buyers for that
currency. So, there is more chance that currency will continuously used for international
transactions. Indian rupee is very less used for international transactions and its transaction
cost is higher.

 Political Power: Political power of a nation is also helpful in internationalization of

currency of that country. Politically powerful nation can push for more local currency use
and settlement. India is not currently much politically powerful nation.

 Government’s Intention: There are both advantages and disadvantages of an international

currency. So it also depends on government, whether it tries to make currency international
or not. Currently Indian government is also trying to increase local currency trade with its
trade partners.