Future of the International Monetary System

International Economics Research

In the contemporary, there is continued deliberation regarding the future of the International Monetary System. Subsequent to the international economic and financial crisis, compounded with the rise of China as the second biggest economy and circulation of the Euro, there has been deliberation of other currencies joining the U.S. Dollar as the reserve currency of the IMF. This report is an attempt to examine the prevailing position of the Indian Rupee in terms of becoming an international currency and its involvement in the International Monetary System. India has materialized as the fastest growing key economy in the world. The enhancement of the nation’s economic rudiments has fast-tracked in the year 2015 with the collective impact of strong government reforms. Taking into account the characteristics of an international currency within the international monetary system, such as the U.S. Dollar and the Euro, the current status of the Indian Rupee is yet to solidify as an international medium of exchange. The Indian Rupee fails to satisfy the features of a global currency. The nation needs to have significant improvement in its GDP, its foreign exchange turnover rank and also the share of trade.


In recent years, there has been considerable debate over the future of the International Monetary System. The global economic and financial crisis cast doubts regarding the prevailing global exchange rate system. The string instabilities in exchange rates, regardless of whether it is between the U.S. Dollar and the euro or currencies in Eastern Europe, repeatedly give rise to uncertainties in the financial market. Similarly, fixed exchange rates, for instance, between China and the United States, are an underpinning for accrual of major imbalances (Belke et al., 2011). Since the Second World War, the United States Dollar has been the reserve currency of the International Monetary Fund. However, the forthcoming periods may encompass other currencies with the Chinese Renminbi, Indian Rupee and Brazilian Real becoming a part of a multi-polar currency system with the Dollar and Euro (Kadyan, 2014).

Indian economy is amongst emerging economies in the globe, experiencing a high growth rate. The nation’s market share in global trade has also increased in recent years. Taking into account the size of the nation and future prospects, India cannot be overlooked. India is also steadily growing to be a sought-after destination for Foreign Direct Investment (FDI) and Foreign Institutional Investors (FII). What is more, there has been a progressively increasing demand for the Indian Rupee in the global financial markets, to the extent that a number of transnational institutions have begun to issue financial bonds in Indian Rupee (Kadyan, 2014). The inference of this is that there are good prospects of the Indian Rupee becoming an international currency. The purpose of this report is to examine the different factors that influence this aspect in relation to the international monetary system.

The following are the proposed research questions to be evaluated and reviewed in this report:

1. Taking into account the characteristics of an international currency within the international monetary system, such as the U.S. Dollar and the Euro, what is the current status of the Indian Rupee at the international level?

2. What are the aspects that aid in making a currency a global or international currency, and where does the Indian Rupee stand with regard to these aspects?

3. What role is the Indian Rupee going to play in the future as an off-shore currency, taking into consideration the nation’s endeavors to increase local currency trade?

Literature Review

The International Monetary System has evolved in different phases, which include the gold standard era (1819-1914), the interwar period (1914-1939), the post-World War II

Bretton Woods System (1946-1973) and the present post-Bretton Woods System (1973 to present) (Lin et al., 2012). During the gold standard epoch, majority of nations were on some kind of the gold standard. However, China and India were significant exclusions as they maintained a silver standard. In the interwar phase, the UK and the U.S. had been allowed to possess gold reserves; however, other countries might possess both gold as well as pounds or dollars as their reserves with the purpose of evading the issue of gold shortage. The Bretton Woods System brought about fixed exchange rates against the U.S. dollar, which had a fixed price in terms of gold at U.S.$35 per ounce (Lewis, 2015). Subsequent to the demise of the Bretton Woods System, the fixed price in terms of gold at U.S.$35 per ounce was scrapped off. To the present day, the dollar has maintained its position as the dominant currency in the international monetary system.

In accordance to basic monetary economics, within an economy, money serves three elementary functions, which include serving as a unit of account, as a medium of exchange, and as a store of value. Likewise, an international currency serves equivalent functions in numerous economies. An international currency as a unit of account, is employed to charge commodities of trade, as a denomination in financial transactions, and to delineate exchange rate uniformities (Tavlas, 1998). Secondly, as a medium of exchange, an international currency is utilized in the direct exchange of currencies and as a vehicle currency in executing indirect exchanges between two other currencies in foreign trade and global capital transactions. In addition, it is employed for financing balance of payments and as a vehicle for exchange market involvement. Lastly, as a store of value, an international currency is employed in the selection of financial assets, for instance financial bonds and holding the currency as a reserve (Tavlas, 1998).

Kadyan (2014) outlines the main characteristics of an international currency to include international financial market domination, invoicing currency, pegging currency, reserve currency, and hand-to-hand currency. International currency is employed for charging or pricing of international trade. In particular, it is utilized even when no partner in the trading transaction is the origin nation of that currency (Kadyan, 2014). Krugman (1984) outlines this aspect using the U.S. Dollar. In goods trade between any two nations, there is a predilection for demanding payment in exporter’s currency, but also a predilection for demanding payment in the currency of the bigger nation. This, in itself, offers the United States, as the biggest economy in the globe, a lopsided share of the invoicing. Moreover, a great deal of trade, regardless of whether it involves the United States or not, is invoiced in dollars. In monetary transactions, the dollar is the prevailing currency for global borrowing and lending, though this supremacy is not comprehensive (Krugman, 1984).

International currency is employed for denominating securities in the global financial market. Majority of global securities are issued in the lead international currency (Blinder, 1996). The role played by the international currency in the global financial market is measured by foreign exchange revenue of a currency, cross border claims in currency, global debt or bond securities denominated in that currency (Kadyan, 2014). According to Goldberg and Tille (2008), a currency is deemed to be a hand-to-hand currency at the global level when it is employed by non-residents for their transnational trade disbursement and for their resident practices as well. In nations with high inflation, even the resident trading is undertaken in the foreign currency. This may be implemented formally, also referred to as dollarization, or implemented behind closed doors. In numerous nations, the U.S. Dollar is employed as the second major currency or in other cases, has entirely replaced the local currency (Goldberg, 2010). Indian rupee is employed as a hand-to-hand currency in a number of nations at a low measure. According to Kadyan (2014), Indian Rupee is accepted in Bhutan and other towns in Nepal. What is more, the currency is also espoused in other nations including Sri Lanka, Malaysia, Indonesia, Singapore, and the United Kingdom. Therefore, Indian rupee is employed as hand-to-hand currency at a number of expanses, but its role is very trifling, as international currency used for medium of exchange (Kadyan, 2014).

Pegging takes into account the fixing of exchange rate between two currencies. As outlined, this is when a nation pegs its currency with another currency, and thereafter endeavors to sustain a fixed exchange rate between two currencies (Page, 1981). This is undertaken when the government or central bank intervenes in the foreign exchange market. By far and large, pegging is undertaken either to a key trade partner’s currency to sustain unpredictability of exchange rate or with a strong currency for monetary and fiscal policies to stay in some particular borders (Obstfeld & Rogoff, 1995; Kadyan, 2014). Three decades ago, majority of the world trade was pegged to the dollar. In the contemporary, only a restricted number of smaller nations continue to be. Nonetheless, this does not signify the rise of a contending currency, but the relinquishment of fixed rates completely (Krugman, 1984). According to Kadyan (2014), the Nepali rupee and Bhutan ngultrum are pegged to the Indian Rupee. At the outset of the 60’s period subsequent to the formation of Nepal Rastra Bank, Nepali rupee was pegged to Indian rupee at the rate of 1.6 Nepali Rupees for 1 Indian Rupee. In 1974, Bhutan ngultrum was instigated and instantaneously pegged to Indian rupee pegged at 1 Bhutan ngultrum for 1 Indian rupee (Kadyan, 2014).


A key aspect to consider the Indian Rupee as an international medium of exchange encompasses the invoicing of exports and imports. The following table indicates the imports and exports of the nation and its invoicing currency.

Table: Currency-wise invoicing pattern of India’s exports and imports

(Per cent)

Sr. No

Name of Currency














Pounds Sterling












US Dollar












Japanese Yen
























All other Currencies











Source: Reserve Bank of India

In analyzing the table above, it can be seen that majority of the invoicing for imports and exports in India is undertaken in the U.S. Dollar. The percentage of invoicing pattern of India’s exports and imports taking place in the U.S. dollar is beyond the 80% mark. With respect to the exports, the invoicing in dollar denomination is constantly increasing. Similarly, with regard to imports, the invoicing in dollar denomination is incessantly high. This is followed by the Euro, which ranked at about the 10% mark. Invoicing in other currencies, such as the Pounds Sterling, Japanese Yen, and also the Indian Rupee, is amassing for both imports and exports, however at a negligible rate (Reserve Bank of India, 2014). Taking into consideration that majority of India’s imports and exports are invoiced in the U.S. dollar denomination, this implies that without doubt the Indian Rupee is currently not employed as an invoicing currency at the international level. Therefore, it does not satisfy the features of an international currency (Vageesh, 2014).

The recent global and financial crisis has instigated a profusion of qualms regarding the future of the international monetary system and prospective alternative reserve currencies. An international currency is employed for sustaining official reserve by central banks of nations (Moghadam, 2009). Reserves are retained in a currency that is more steady and valued. If not, with the change in exchange rate, there will be change in the amount of official reserve, which may be detrimental to the central banks. Therefore, it is prudent to retain reserve in a strong currency. In recent periods, the U.S. dollar and euro have dominated as reserve currencies. The following table considers the currency reserve pattern from the International Monetary Fund to analyze the position of the Indian Rupee.









Pound Sterling














U.S Dollar







Japanese Yen







Swiss Franc







The rest of other currencies







Source: International Monetary Fund

In analyzing and evaluating the data above, it can be seen that the U.S. dollar is employed more than 60% as the official global reserve. However, it can be perceived that the global share of the currency has slowly declined. Second in the ranks is the Euro, which is employed at more than 25%. The Japanese Yen and the Pound Sterling are next in line being ranked at the 4% and 3% marks. In recent years, other currencies have had a slightly increasing share of the global reserve. The International Monetary Fund data does not distinctively delineate the global reserve share of the Indian Rupee. The inference of this is that the supposition made is that the currency may have a very negligible share or none at all. Taking this into consideration, it implies that the Indian Rupee at the moment cannot serve the function of a reserve currency and be an international currency similar to the U.S. dollar (Kaydan, 2014).

India has materialized as the fastest growing key economy in the world. The enhancement of the nation’s economic rudiments has fast-tracked in the year 2015 with the collective impact of strong government reforms. This encompasses the low inflation focus by the Reserve Bank of India (RBI) supported by benevolent international commodity prices (India Brand Equity Foundation, 2016). In accordance to the International Monetary Fund (2016), as pointed out in its World Economic Outlook Update, the economy of India is projected to grow at about 7.5% in the 2016-2017 fiscal year, regardless of the uncertainties in the international market. In addition, this growth rate is projected to speed up to 8% by the 2018-2019 fiscal year. This economic growth is expected to be driven by the ongoing execution of structural reforms, greater disposable income and augmentation in economic activity (India Brand Equity Foundation, 2016).

The economic performance of the Indian economy can be perceived on several other fronts. At the outset of April 2015, the foreign exchange reserves of India stood at 342 billion U.S. dollars. However, there was a considerable increase as the foreign exchange reserves of the nation rose up to 360 billion U.S. dollars at the same time this year (Reserve Bank of India, 2014). In addition, the securitization market of India rose up by 45% every fiscal year to Rs 25,000 crore in the 2016 fiscal year, which is equivalent to 3.7 billion U.S. dollars. This is fundamentally owing to the increased amount of asset-backed securitization dealings ((India Brand Equity Foundation, 2016).

One of the key factors that facilitate making a currency an international currency is gross domestic product (GDP). In order for a currency to become international, it is imperative that the size of the local economy be significantly large. This is significant for the reason that both the economy and the currency will be significant globally. Being part of the BRIC nations, the economy of India is considered to be not only one of the emerging economies, but rather one of the fastest growing ones. In recent years, the measures undertaken by the Indian government have instigated constructive results for the nation’s gross domestic product (GDP). The graph below outlines the GDP growth rate for the past decade.

The GDP of India progressed 7.3% year-on-year in the preceding 3rd quarter of FY 2016, subsequent to a 7.1% growth in the preceding period, failing to live up to the market projections of 7.5% growth rate. A key element that progressed the nation’s GDP, is the growth in private consumption, which fast-tracked from 6.7% to 7.6%. In the past two financial quarters, the nation’s exports increased by 3.5% whereas the imports deteriorated by 14.8% (Trading Economics, 2016). The GDP growth rate of the Indian economy in the past two financial quarters has slowed down and failed to meet market expectations. However, if the GDP size of the nation is able to advance at a pace that is equivalent to the 9% growth rates of the past, this will facilitate the Indian Rupee to become an international currency.

Another important factor for an international currency is share in world trade. For an economy to have an international currency, its share in world trade should be significant. In accordance to the World Trade Organization (2016), trade per capita of India between FY 2013-FY 2015 stands at U.S.$ 382. In addition, the level of trade, in terms of GDP percentage FY 2013-FY 2015 stands at 24.8%. India’s share in exports of services was 3.2% whereas for imports was 3.1%. In addition, India is currently ranked 13th with respect to imports and 19th with respect to exports. Taking into consideration the trade ranking of India, it implies that the nation is presently not dominant. The nation is considerably behind in global trade. The plummet is a major stumbling block to the aspiring plans of amassing India’s portion of world trade from the prevailing level of 2.07% to 3.5% by 2020. In the contemporary, this percentage slightly declined from 2.12% in 2012 to the existing level. This mark appears hard to attain unless there is a significant improvement in export growth over the next few years (Ramachandran, 2015).


In recent years, the debate over the future of the International Monetary System has intensified. China has replaced Japan as the second largest economy in the world and the Euro has become the largest single currency in circulation among European nations due to the change in world economic order. The Yuan is the leading currency in Asia, yet the Indian Rupee is not far behind. Considering these developments, the future of the International Monetary System will be influenced greatly. For now, the U.S. dollar remains the reserve currency of the International Monetary Fund; however, the future may involve other currencies. This report takes into consideration whether India and its currency is able to become an international currency.

According to Kaydan (2014), the main characteristics of an international currency to include international financial market domination, invoicing currency, pegging currency, reserve currency, and hand-to-hand currency. The Nepali rupee and Bhutan ngultrum are pegged to the Indian Rupee. However, in comparison to the U.S. dollar, the currency is yet to have a great deal of dominance. Secondly, the percentage of invoicing pattern of India’s exports and imports taking place in the U.S. dollar is beyond the 80% mark. Since most of its trading is invoiced in the U.S. dollar denomination, it means that the Indian Rupee is presently not used as an invoicing currency at the global level. Therefore, it does not satisfy the features of an international currency (Vageesh, 2014). In addition, other key elements include the GDP of the nation, size of the nation, and global trade share. The GDP growth rate of Indian economy in the past two financial quarters has slowed down and failed to meet market expectations. In addition, India is noticeably lagging in global trade, which is a major stumbling block. Taking into account the characteristics of an international currency within the international monetary system, such as the U.S. Dollar and Euro, the current status of the Indian Currency as an international Exchange is yet to solidify. The nation needs to have significant improvement in its GDP, its foreign exchange turnover rank and also the share of trade (Kadyan, 2014).


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Goldberg, L. S. (2010). Is the international role of the dollar changing? Current Issues in Economics and Finance, 16(1).

Goldberg, L. S., & Tille, C. (2008). Vehicle currency use in international trade. Journal of international Economics, 76(2), 177-192.

India Brand Equity Foundation. (2016). Indian Economy Overview. Retrieved from: http://www.ibef.org/economy/indian-economy-overview

International Monetary Fund. (2016). IMF World economic Outlook Update. Retrieved from: www.imf.org/external/pubs/ft/weo/2016/update/01/

Kadyan, H. (2014). Indian rupee’s role as an international currency. Abhinav-National Monthly Refereed Journal in Commerce & Management, 3(2).

Krugman, P. R. (1984). The international role of the dollar: theory and prospect. In Exchange rate theory and practice (pp. 261-278). University of Chicago press.

Obstfeld, M., & Rogoff, K. (1995). The mirage of fixed exchange rates (No. w5191). National bureau of economic research.

Page, S. A. B. (1981). The choice of invoicing currency in merchandise trade. National Institute Economic Review, 60-72.

Ramachandran, S. (2015). India Way Behind in Global Trade. Tribune India. Retrieved from: http://www.tribuneindia.com/news/comment/india-way-behind-in-global-trade/118237.html

Reserve Bank of India. (2014). Foreign Trade Statistics: Press Release. Retrieved from: https://rbi.org.in/SCRIPTs/BS_PressReleaseDisplay.aspx?prid=30943

Tavlas, G. S. (1998). The International Use of Currencies: The U.S. Dollar and the Euro. Finance & Development, 35 (2). Retrieved from: http://www.imf.org/external/pubs/ft/fandd/1998/06/tavlas.htm

Trading Economics. (2016). India GDP Annual Growth Rate. Retrieved from: http://www.tradingeconomics.com/india/gdp-growth-annual

Vageesh, N. S. (2014). Dollar dominates invoicing pattern of India’s foreign trade. The Hindu Business Line. Retrieved from: http://www.thehindubusinessline.com/economy/dollar-dominates-invoicing-pattern-of-indias-foreign-trade/article5534392.ece

World Trade Organization. (2016). Trade Profiles: India. Retrieved from: http://stat.wto.org/Countryprofile/WSDBCountryPFView.aspx?Language=E&Country=IN

Moghadam, R. (2009). Reserve Currencies in the Post-Crisis International Monetary System. IMF Direct. Retrieved from: https://blog-imfdirect.imf.org/2009/09/24/reserve-currencies-in-the-post-crisis-international-monetary-system/

Lewis, W. A. (2015). The evolution of the international economic order. Princeton University Press.

Lin, J. Y., Fardoust, S., Rosenblatt, D. (2012). Reform of the International Monetary System: A Jagged History and Uncertain Prospects. World Bank: Policy Research Working Paper, 6070.

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