As I have talked in the past, the value of Indian rupee against US dollar continues to decline. Rupee has now hit its historical low level of Rs.80 per dollar. Indians are feeling the heat of the RBI generated inflationary monster.
Against this background the Indian news media have started peddling a thought that somehow RBI and Indian government’s decision to trade with other countries in rupees will kill the US dollar, which is an international currency at the present. Disregarding the propaganda nature of this claim, let us examine whether this is possible or not. And if it is possible then under what conditions.
A quick lesson of the demand and supply theory is now needed to understand the following discussion.
What determines the value (purchasing power) of any currency? The answer is: the demand for and supply of that currency in the question. I advise my readers to study Murray Rothbard’s Man, Economy and State to understand this issue in detail. Ceteris Paribus, if demand for rupee rises in the international market vis-a-vis its supply then its price will rise. In other words, it will become stronger against the US dollar. If Demand for rupees falls in the international market then its value will also fall. In other words, it will become weaker against the US dollar. If supply of rupees will rise then its value will decline – i.e., it will purchase less and less with passing time – and it will become weaker against the US dollar. If the supply of rupee will fall then it will become stronger against the US dollar as its value will rise. If both the demand for rupee and its supply will decrease and increase respectively together then its value will decline rapidly and it will become very weak against US dollar in the international currency market, and vice versa.
The next logical question that arises out of the ongoing discussion is, what determines rupee’s demand and supply? The answer for supply is easy: the Indian central bank RBI [Reserve Bank of India]. RBI has a monopoly of issuing (printing) rupees in India and because RBI is wholly owned by the Indian government since its nationalization, the Indian government determines the supply of rupees. Rupee’s demand is determined by many factors. The demand for rupee by Indians is determined by its purchasing power. If rupee’s value and so its purchasing power are higher then more Indians will want to keep it in their cash balance. Conversely, if rupee is losing value over a period of time, as it has been losing since its inception thanks to RBI’s loose money policies, no one will want to hold it in their cash balances for a long time. They will discard it as soon as they receive it. Rupee’s purchasing power in turn depends on its supply which RBI and its owner government controls. When RBI prints more money its purchasing power declines – i.e., it buys less and less goods every passing day – and so peoples’ demand for it declines. Rupee is a medium of exchange so it is only good if it buys more goods for us. No one keeps rupees in their cash balance just for the sake of keeping it. This decline in its demand further reduces its purchasing power creating a downward spiral where RBI’s inflationary policy will get out of its control and inflation will quickly turn into hyperinflation like Zimbabwe in 2008. Thus by printing rupees incessantly RBI is playing with fire.
The demand for rupees in the international market will be determined by its demand by the international buyers of Indian goods, who will need it to purchase Indian goods if the international trade is conducted in rupees, which is not the case right now.
When can the rupee become international currency? To understand how Indian rupee can become an international currency we need to understand why the US dollar is an international currency right now.
As we have seen in the case of Indian rupee, people demand a currency only when its purchasing power is either stable or increasing, and the purchasing power of a currency depends on the policy actions of the central bank which controls the supply of that currency. Since its inception the US Federal Reserve bank has eroded much of the dollar’s purchasing power, likewise other central banks have printed even more local currencies in their respective nations and eroded their currencies more so compared to US dollar. Also, US Fed can export its inflation to other countries via the International payment mechanism and so lessen some of the inflationary impact on dollars in the local economy. Overall, US central bank is slower in eroding purchasing power of the dollar compared to other central banks in eroding purchasing power of their local currencies. This is why people still want to hold onto US dollars and not Indian rupees.
Apart from the actions of the central bank, the soundness of the American economy throughout all these years is behind the strength and acceptance of dollar as an international payment system. The Judeo-Christian values of the American society and its capitalist economy, at least for the initial 150 years of its founding, gave it the economic strength which is necessary for dollar’s supremacy in the international market. People of the world still trust the US government to honor its promises and maintain the purchasing power of the dollar. And if we argue that the coercive military threat behind the petro-dollar system is behind the acceptance of US dollar as an international currency by other countries then also the strength of the American economy, which lies behind the strength of the US military power, is responsible for the success of the petro-dollar system.
As American economy and society is turning in the direction of communism since last 100 years or so, all these will change in the future. The supremacy of US dollar is surely in doubt but not because of the strength of Indian rupee or Chinese yuan, but because of American politicians and voters’ own faults. If dollar will be ruined in the future then Americans themselves are responsible for it, and no Indian government or its central bank RBI’s actions.
The reason why the Indian government or its central bank can’t kill the US dollar, or any other currencies of the world, or why rupee can’t become an international currency is because India lacks the American culture and its value which gave America the economic and ensuing political strength that it has today. Indian society is collective, primitive, and tribal. The Indian nation state was not conceived in Liberty like the united states of America. Indian constitution established the Indian nation state as a socialist, secular, democratic republic. India is socialist by its very nature, and no socialist country can ever become an economic powerhouse which can give its currency the strength to become an international currency. Indian military can’t protect Indian rupee in the international market because Indian nation state doesn’t have the economic strength to project its power in the world. Indian politicians, who are backed by irrational Indian voters, are all demagogues who will never allow the spirit of Liberty to reign supreme in India. Without Liberty no society or economy can flourish.
In the absence of a strong economy the demand for rupee both in the national – Indians themselves don’t keep rupee for long in their cash balance as seen in their action of buying more than 1000 tonnes of gold every year – and international economy will remain low while RBI keeps on printing tons of rupees every year. These combined forces means rupee will continue to lose its purchasing power rapidly with every passing year. In such case, the chances of rupee defeating the dollar is close to zero.
If America is becoming weaker it doesn’t automatically mean India is becoming stronger. People of the world still put their trust in US dollar because no other country is in a position to provide a stable economic, social, and political environment for the world. A broken America is still better than authoritarian Russia, China, or India. The day America will fall, the whole world will fall with it.
Indian news media and its backer government are just trying to deceive the gullible Indian voting public with such baseless stories and arguments. They are trying to hide the fact that despite so much weakness in the American economy, Indian rupee is still weakening rapidly against US dollar. And as the US central bank continue to raise their rates, Indian rupee will continue to decline against US dollar. No amount of propaganda will help hide the weakness of Indian rupee.
In the end, as I have said above, if someone will kill the US dollar then that will be American politicians and its central bank the US Fed. Indian politicians and RBI are actually killing the Indian rupee and not US dollar.