UPDATE 1-India cbank study says yuan far from reserve-ready

* Yuan “far from ready” for reserve role: India cbank study

* Rupee internationalisation risks greater volatility-study

* Dollar unlikely to lose predominance any time soon-study
(Updates with details, quotes)

By Swati Bhat

MUMBAI, May 18 (BestGrowthStock) – A more international role for the
Indian rupee could expose it to significant volatility, while
the Chinese yuan is “far from ready” to gain reserve currency
status, a Reserve Bank of India study said on Tuesday.

Rather, it said China’s yuan was likely first to become a
regional currency as trade links with its neighbours expand.

“However, India needs to take steps to increase the role of
the Indian rupee in the region to catch up with the growing
influence of the Chinese Renminbi,” the study said.

The rise of China and India, the two largest countries and
fastest-growing economies, as more developed economies struggle
to emerge from the global downturn has fuelled discussion about
reform of the global monetary system.

The RBI report said the dollar was unlikely to lose its
predominance as a global reserve currency any time soon.

India’s rupee is fully convertible on the current account
but not on the capital account, and efforts to fully liberalise
it were stalled in part by the global downturn. China,
meanwhile, is under international pressure to increase the value
of the yuan, which is pegged to the U.S. dollar.

“In view of the large current account deficit, the exchange
rate of the rupee is susceptible to the debilitating influence
of large capital movements, especially during crisis periods,”
the RBI study said.

“Since the depth of the Indian financial market is
relatively less, such volatile capital flows can impart
significant volatility to the Indian rupee,” it said, warning of
the dangers of hot money flowing into and out of the country.

Almost all of India’s trade is dollar-denominated, it said.

“The hallmark of any international currency is that
invoicing of tradable goods between countries is done in
internationalised currency,” the report said.

The global financial crisis eroded confidence in the U.S.
dollar as a global reserve currency. Sovereign debt woes in the
euro zone, meanwhile, have recently put the euro under pressure.

The report noted that sceptics believe China’s yuan, or
renminbi, is far from global “safe haven” status because it is
not convertible and its stability is partly due to its dollar
peg.

To make the yuan an international currency, China would have
to ease restrictions on flows in and out of the country, make
its currency fully convertible for such transactions, continue
with financial reforms and make its bond markets more liquid,
the report said.

It also said that while it would take a long time before the
yuan could become a reserve currency, such a possibility was not
“totally unrealistic.”

For the entire study on the central bank’s website click:
http://rbidocs.rbi.org.in/rdocs/Content/PDFs/RRSS180510F.pdf
(Editing by Tony Munroe/Ruth Pitchford)

UPDATE 1-India cbank study says yuan far from reserve-ready