This index can be India based and be a trade weighted Indian version of the USDX or the globally dominant Dollar Index.
As the global economic axis moves firmly towards Asia, with the vast chunk of global GDP being generated out of the countries of this continent, we find that only a subset: East, North and South East Asia are decently represented at the global portfolio high table. There is no doubt that most central banks now hold substantial reserves of Chinese Remnimbi, Japanese Yen, South Korean Won, Hong Kong Dollars and Singapore Dollars, but some other major players are still missing. The time to remedy this is here.
It is clear that Asian currencies have been classified (and perhaps for the second time this century, after credit derivatives and the global financial crisis, been misclassified) by portfolio managers worldwide, via excessive and unimaginative adherence to the pronouncements of ratings agencies.
Take for example the positioning of BBB+ Thailand, BBB Indonesia and BBB- India. There is no question that these three BBBs are giants in the region, not just in terms of quality and volume of output but diversification of the asset base, In fact if one were to go a step further the level of access to markets and products, the information systems, the programming skills required for modern finance, the manufacturing, services (including tourism) and educational sectors are formidable in all three locations. Yet they find very limited place in the global model.
We cannot speak for the other BBB countries but we can act in a way that may actually be a way for them as well. We therefore propose we bring a lot of the trading onshore top ensure that capital constrained to being deployed away from these locations is brought into the Indian market. Apart from institutional arrangements, of which great initiatives like Gift City are under way, we propose a series of financial instruments that integrate the region better beginning with an Asian INR Index.
This index can be India based and be a trade weighted Indian version of the USDX or the globally dominant Dollar Index. Investigation shows that over 30% of India’s trade is with Asia, with a whopping 17% with China, and substantially with the UAE, Saudi Arabia, South Korea, Japan, Singapore and Malaysia. Herein lies the basis of an index.
Such an index would not only provide opportunity for Indian exporters to hedge their exposures to all these countries but also to take correlated views and positions. Note that the exposure to the UAE and Saudi Arabia are mainly USD denominated whereas in the others it is local currency denominated. By nature such an index offers a natural USD cross to the other currencies, a much more efficient option for an Indian exporter or trader, and at the same time a great implicit Asian portfolio position.
In essence creating liquidity in and trading such an index and derivatives on it would deliver a substantial amount of value not just to onshore players in India but players in Hong Kong and Singapore at the least. The time is here for India to produce this index. Even the original players in the USDX will be delighted with it, not to mention the players in Asia.
[This is an authored article by Ranjan Chakravarty, MSE. All views, opinions and expressions are personal and limited to the author.]