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Can we no longer trust the Indian rupee?

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Devina Gupta
Devina GuptaDec 14, 2016 | 18:25

Can we no longer trust the Indian rupee?

As the Indian currency witnesses the most tumultuous time in its 69-year-old history, it stares at an existential question.

Every note that is printed by the Reserve Bank of India (RBI) has a declaration that makes it legal tender. With new RBI governor's signature, each note has the message: "I promise to pay the bearer the sum."

This is the promise that gives value to the simple bank note - a concept explained as the "fiat currency" in the modern economy. Historically, gold, silver, copper coins have been used for financial transactions. Irrespective of the government in power, the metals retained their set values as opposed to modern currency - which is usually made of paper (or plastic) - and it's the authority's faith in the currency that decides its value.

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It is dangerous for economies when policy decisions threaten to erode the public's trust in their own currency.

So while the fallout of demonetisation is being debated, what's left unsaid is the credibility crisis that the Indian rupee may land in, if it fails.

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A similar sword hangs above the heads of thousands who are thronging their banks to withdraw their savings, with cash deficit leaving them short-changed. Credit: Reuters

"If you look at your rupee note, be it worth Rs 500 or Rs 1,000, what does it say? It says above the signature of the governor, I promise to pay the bearer this amount. That's a sovereign promise to the people of this country. The faith in currency of any country is extremely important because, after all, the paper has no value", said Rakesh Mohan, former deputy governor of RBI to India Today.

Examples from past are worrying to say the least. In 1982, Ghana tried to demonetise its 50 cedi notes to curb corruption, but it backfired with the public choosing physical assets and foreign currency for investment.

Even Nigeria tried to introduce new currency notes in 1984, which failed to fix their economy. Former president of the Soviet Union, Mikhail Gorbachev faced a coup in eight months when he withdrew 50 and 100 roubles in January 1991.

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Students hit the streets in Myanmar after the Junta invalidated 80 percent of country's currency in 1987.

A similar sword hangs above the heads of thousands who are thronging their banks to withdraw their savings, with cash deficit leaving them short-changed.

The central bank has printed 1.7 billion in new currency, but even before the dust can settle, RSS ideologue S Gurumurthy has dealt another jolt to the currency's credibility.

Gurumurthy has asserted that the 2000-rupee note is just a stop-gap arrangement and would be phased out eventually.

"They would ultimately, I don't see a logic of Rs 2000 notes," said Kiran Karnik, former director of the central board of RBI.While the RBI has replaced the old currency in the system constantly, given the large-scale efforts to replace 86 percent of the 1000 and 500 bank notes, can the government risk another economic uncertainty?

And, should the cash crisis continue, will there be an erosion of trust in using Indian currency? Well, "fiat" in Latin does mean "it shall be".

Last updated: December 14, 2016 | 19:13
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