x Abu Dhabi, UAEFriday 21 July 2017

India to diversify reserves away from dollar

The subcontinent has joined countries including China, Russia and Brazil in pushing to diversify their reserves away from the dollar.

India has joined countries including China, Russia and Brazil in pushing to diversify their reserves away from the dollar, with growing concern over the management of the world's largest economy. The threat to the reserve status of the US currency, which could intensify at this week's summit of the Group of Eight (G8) industrialised nations, also raises questions in the Gulf, where most currencies are pegged to the dollar.

Suresh Tendulkar, an adviser to Manmohan Singh, the prime minister of India, said he was urging the government to diversify its US$264.6 billion (Dh971.87bn) of foreign exchange reserves away from the greenback. "The major part of Indian reserves are in dollars. That is ... a problem for us," said Mr Tendulkar, the chairman of Mr Singh's economic advisory council. Mr Singh will join G8 leaders from the US, Japan, Germany, Britain, France, Italy, Canada and Russia at the summit in Italy on Wednesday, which is to tackle the global economy. China and Brazil will also send representatives.China and Russia have increased calls for a rethink on global currency reserves, underlining a shift from the developed nations that sparked the financial crisis. Many expect the dollar to weaken as US spending rises.

Russia, Brazil, China and India have expressed interest in IMF bonds, instead of US treasuries. Analysts say the changes would also hold significance for the Gulf. "I wouldn't expect the Gulf states to be at a forefront of a move away from the dollar but if the dollar status changes, their relationship would inevitably change as well," said Simon Williams, HSBC's chief economist for Gulf markets.

Speculation that GCC states would depeg from the dollar has died down in recent months as inflation has eased and focus has been diverted to concerns about economic growth. Kuwait is the only GCC member to have broken away from the dollar peg. But analysts say the issue is likely to resurface, particularly if the region adopts a single currency. "The arguments in favour of a currency reform are strong and with time I do expect to see change," Mr Williams said.

The UAE has developed its bond markets to give it more control over its monetary policy."One of the lessons the Gulf will draw from the period of rapid growth and rapid slowdown is that there is a need to enhance the region's ability not just to generate growth, but to moderate and control the pace of growth and a more developed monetary policy environment," Mr Williams said. He said depegging would be part of this reform process in the Gulf.

But some analysts argue there is little justification for GCC currencies to depeg. "It's natural there would be a shift in reserve holdings of countries to reflect the emergence of China and gradual shifts in the global economy, but the dollar is going to remain the reserve currency for some time," Paul Gamble of Jadwa Investment said. * with Bloomberg rbundhun@thenational.ae