Euro Induction Will Force Rbi To Change Composition Of Reserves

The Reserve Bank of India (RBI) will change the composition of its foreign exchange reserves once the European Monetary Union (EMU) commences in January, 1999, and the euro becomes the official currency.

The RBI currently maintains its reserves in various currencies with a strong bias for the dollar. The other currencies that form a substantial part of the reserves include European currencies like sterling and deutscheMark. The Japanese yen is also an important currency in the reserves.

However, once the EMU commences, the currencies of member countries will be converted into the Euro in the RBI reserves. Forex transactions in these erstwhile currencies will be in euros.

 

This has implications for banks forex operations around the world who if asked to make a payment in deutscheMark or French franc will have to calculate the equivalent value in euro. Conversely, banks will receive payments in euros for credit to national currency accounts. The national currency of the EMU countries will continue to exist as denominations of the euro till 2002.

However, officials point out that the crucial question before the RBI is how much of its reserves should it hold in euros as it is felt that the euro may turnout to be stronger than the dollar. The euro is expected to be a formidable currency once all countries join the EMU. Even now a European Economic Unit (ECU), the currency for official European transactions, is 1.15 to a dollar.

Geoffrey Ledden, of Standard Chartered Bank, says, the RBI may have to drastically reduce the proportional dollar holding in the reserves as the euro will emerge as a strong currency.

Ledden is touring the globe to explain the implications of the euro on countries outside the European Union.

Unlike domestic commercial banks, the RBI is taking the euro seriously. This could create problems for the domestic banks as companies like Siemens will deal only in the euro from 1999.

Sources point out that the present 15-country EU has stronger fundamentals than the US, implying a stronger euro. In 1995, the GDP for the EU and the US stood at $84 trillion and $71 trillion respectively.

Further, their respective shares in world trade was 21 per cent and 19.6 per cent.