The Chinese currency, renminbi (RMB), will eclipse the US dollar as the premier reserve currency by the end of this decade. This was one of the conclusions made by Prof. Arvind Subramanian from Peterson Institute for International Economics and the Center for Global Development, while speaking at the Reserve Bank of India, on Friday.

In his book Eclipse: Living in the Shadow of China's Economic Dominance , Prof. Subramanian has argued why over the next 20 years China will be a superpower and the biggest economy in the world.

China has emerged as the world's largest exporter and a big creditor.

Trade hub

When Asian trade becomes more China-centred there is no reason for it to be dollar- denominated. It will be progressively denominated in RMB, settlements will happen in RMB, and financing will happen in RMB. Therefore, China will be under greater pressure to open up, Prof. Subramanian explained.

In the last 2-3 years there has been a steady drip of measures that the People's Bank of China has taken to internationalise their currency.

The internationalisation of the RMB will lead to more market based interest and exchange rates in China. This means upward pressure on the Chinese currency which is good for India's export competitiveness and growth prospects, he added.

Currency convertibility

About India's cautious approach to currency convertibility, Prof. Subramanian said that it is the right approach. In the medium term, India should allow capital to come in such a way that it deepens the market but does not expose it to vulnerabilities and make the exchange rate unmanageable.

“India needs capital but not so much that it becomes non-competitive,” he said.