The dollar is supreme

By C. R. L. Narasimhan

Popular perceptions have always placed the American dollar on a pedestal much above the pound sterling of the U.K. with which India has had close historical links or the yen of Japan having the second largest economy in the world. In financial circles the dollar's supremacy is taken for granted.

There is no quotation for the dollar in currency dealing rooms in any part of the globe because every other currency is expressed in terms of the dollar. It is possible to ask for, say, a euro against sterling quote but those ``cross rates'' are special.

Overseas travellers are more likely to be issued dollar travellers cheques than in any other currency. (It is nearly impossible to get your bank or money changer to issue say Swiss or French franc denominated TCs).

Not surprising then, much of India's trade (exports and imports) as well as non-trade remittances are denominated in dollars.

How significant the proportion of dollar invoiced trade is to total trade is borne out by a recent Reserve Bank of India study.

It covers data for the last decade, the 1990s, but conclusions derived from the study are valid for earlier decades and most certainly for the next few decades.

The dollar's pre-eminence in trade matters is to be appreciated against the backdrop of India's exchange control rules that allow cross-border transactions to be denominated in many ``permitted'' currencies including the dollar.

Permitted currencies are those which can be converted into major reserve currencies such as the dollar and the sterling. Not only should that country's rules permit such unhindered conversion but there should be an active dealing market for those currencies.

It is therefore not mandatory that a trade transaction between an exporter in the U.S. and an importer in India should be denominated only in dollars. It can be invoiced in, say, the euro, the sterling or the yen or any other permitted currency.

A trader in the U.K. can invoice his transaction to an Indian importer in sterling, dollar or any of the permitted currencies.

Invoicing in rupees is allowed - in fact it was quite significant until 1991 when it had a 7.7 per cent share in all imports. However, India's rupee denominated trade was almost exclusively with the Soviet bloc countries. (There was no other option then). With the collapse of that bloc, trade invoicing has shifted to dollars.

Between 1990-91 and 1999-2000 the combined share of U.S. dollar, DM, euro, yen and pound sterling in India's imports moved in a range of 74.2 to 96.2 per cent. The dollar's share at the start of the decade was 59.7 per cent but jumped substantially to 85.8 per cent by the end of the decade. In contrast, the proportion of DM declined from 7 per cent in 1990-91 to 4.6 per cent in 1998-99 and to 1.6 per cent in 1999-2000.

The introduction of euro was, of course, the main reason. Since 1993-94, the dollar became the intervention currency in India. That made dollar invoicing even more acceptable. Petroleum and related imports have been traditionally dealt with in dollars.

Another interesting finding: on an average as much as 72 per cent of India's imports from non-U.S. destinations were designated in dollars during the 1990s.

The dollar's preeminence is borne out in the invoicing of exports too. In 1990-91, 57.2 per cent of exports was in dollars. Rupee invoicing accounted for 27.7 per cent almost entirely due to the then flourishing trade with the Soviet bloc .

With the disintegration of the Soviet Union, trade invoicing in rupees took a backseat. The dollar has been the beneficiary with its share going up sharply. From 1992 onwards, dollar's share was more than 76 per cent in export invoicing.

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Section  : Business
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