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About Internationalisation of The Rupee

Context:

India is aiming to make the rupee a global currency. Pushing for a roadmap towards the internationalisation of the rupee, the Reserve Bank of India’s (RBI) inter-departmental group (IDG) said with India remaining one of the fastest-growing countries and showing remarkable resilience in the face of major headwinds, the rupee has the potential to become an internationalised currency.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

  1. About Internationalisation of the rupee
  2. Advantages of Internationalisation of the Rupee
  3. Recommendations for Internationalisation

About Internationalisation of the rupee:

  • Internationalisation of the rupee refers to the process of increasing the use and acceptance of the Indian rupee in cross-border transactions.
  • It involves promoting the rupee for import-export trade and other current account transactions, and eventually expanding its use in capital account transactions.
  • The goal is to make the rupee a widely recognized and accepted currency in international markets.

Key points about the internationalisation of the rupee:

  • Gradual Approach: The process of internationalisation is gradual, starting with promoting the rupee for current account transactions and then expanding its use in capital account transactions.
  • Currency Settlement and Forex Market: To facilitate the internationalisation of the rupee, there is a need to further develop the currency settlement infrastructure and strengthen the swap and forex market.
  • Convertibility: Full convertibility of the rupee on the capital account, allowing cross-border transfer of funds without restrictions, is an important aspect of internationalisation. Currently, the rupee has full convertibility only on the current account.
  • Importance of Reserve Currencies: The leading reserve currencies in the world are the US dollar, Euro, Japanese yen, and pound sterling. The internationalisation of the rupee aims to establish it as a viable alternative to these dominant reserve currencies.
  • Relevance and Challenges: The US dollar’s dominance in international transactions provides significant advantages to the United States. China’s renminbi has also emerged as a potential challenger, but its ability to rival the US dollar depends on various factors, including economic policies and the stability of its financial system.
  • Need for Alternatives: Some countries, including China and Russia, have expressed a desire to reduce their reliance on the US dollar and international payment mechanisms like SWIFT. They seek alternatives to safeguard against potential economic sanctions imposed by Western governments.
  • Exploring Alternatives: India, too, aims to explore alternatives to both the US dollar and the Euro. The Reserve Bank of India (RBI) has appointed a group to study and recommend strategies to enhance the internationalisation of the rupee.

Advantages of Internationalisation of the Rupee:

  • Mitigation of Currency Risk: The internationalisation of the rupee helps to reduce currency risk for Indian businesses engaged in cross-border transactions. Protection from currency volatility lowers the cost of doing business and enhances growth opportunities for Indian companies in the global market.
  • Reduced Dependency on Foreign Exchange Reserves: The internationalisation process reduces the need for holding large foreign exchange reserves. This decreased dependence on foreign currency reserves makes India less vulnerable to external shocks and contributes to greater economic stability.
  • Improved Bargaining Power: As the use of the rupee becomes more significant in international transactions, Indian businesses gain enhanced bargaining power. This adds weight to the Indian economy, strengthens its position globally, and garners increased respect and influence on the international stage.

Recommendations for Internationalisation:

Short-Term Measures:

  • Adoption of a standardized approach for evaluating proposals on bilateral and multilateral trade arrangements, including invoicing, settlement, and payment in rupee and local currencies.
  • Encouragement of the opening of rupee accounts for non-residents, both within and outside India.
  • Integration of Indian payment systems with those of other countries to facilitate cross-border transactions.
  • Strengthening the financial market by fostering a 24×5 global market for rupee trading and recalibrating the regulations for foreign portfolio investors (FPIs).

Medium-Term Measures (Next 2-5 Years):

  • Reviewing taxes on masala bonds (rupee-denominated bonds issued by Indian entities outside India) to promote their international use.
  • Exploring the international application of Real-Time Gross Settlement (RTGS) for cross-border trade transactions.
  • Inclusion of Indian Government Bonds in global bond indices.

Long-Term Measure:

  • Efforts should be made to include the rupee in the International Monetary Fund’s (IMF) Special Drawing Rights (SDR), which is an international reserve asset.
  • SDR’s value is based on a basket of currencies, including the U.S. dollar, euro, Chinese renminbi, Japanese yen, and British pound sterling.

Source: Indian Express


October 2024
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