Internationalization of Rupee

CONTEXT: RBI ‘s inter departmental group have said that the rupee has potential to become internationalized currency.

The group was constituted by RBI Deputy Governor T Rabi Sankar to review the position of the rupee as an international currency and to frame a road map for the internationalisation of the domestic currency.

WHAT IS INTERNATIONALIZATION OF  RUPEE?

Internationalisation of the rupee is a process that involves increasing use of the local currency in cross-border transactions.

It involves promoting the rupee for import and export trade and then other current account transactions, followed by its use in capital account transactions.

• Rupee arrangements with Bhutan and Nepal for a long time,
• Recent decision by Sri Lanka to formally include the rupee as a designated foreign currency augurs well for incremental internationalisation of the domestic currency.

RECOMMENDATIONS OF INTER-DEPARTMENTAL GROUP (IDG)

Long term measures

• Inclusion of the rupee in the Special Drawing Rights (SDR) basket
  • SDR is an international reserve asset created by the IMF (International Monetary Fund) to supplement the official reserves of its member countries.
  • The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
• Recalibration of the foreign portfolio investor (FPI) regime to accelerate the pace of internationalisation of the rupee.
• RBI should also look at expanding the footprint of rupee denominated payment mechanism
• RBI should step up measures for the inclusion of Indian Government Bonds (IGBs) in global bond indices.
• Rationalisation of the FPI regime to facilitate a more conducive environment for foreign investments into the Indian debt markets (both government and corporate).
• Non-residents should be allowed to open rupee account as the ability to open accounts outside the country of the currency

Medium term measures

• Review of withholding tax for masala bonds issuances
• Expansion of RTGS (Real Time Gross Settlement) system for settling international transactions
• Inclusion of the rupee in Continuous Linked Settlement (CLS) system.

Short term measures

• Higher usage of the rupee in invoicing and settlement of international trade, as well as in capital account transactions, will give the domestic current a progressively international presence.
• Use of the existing bilateral and multilateral payment and settlement mechanisms, such as ACU (Asian Clearing Union)

ADVANTAGES OF INTERNATIONALISATION OF THE RUPEE

• The use of the rupee in cross-border transactions mitigates currency risk for Indian businesses.
• It enables better growth of business, improving the chances for Indian businesses to grow globally.
• Reduces the need for holding foreign exchange reserves.
• Reducing dependence on foreign currency will make India less vulnerable to external shocks.
• Bargaining power of Indian businesses would improve, adding weight to the Indian economy and enhancing India’s global stature and respect.
• Internationalization of the rupee can reduce transaction costs for Indian businesses.
• A more freely traded rupee can enhance India’s competitiveness in global markets

CHALLENGES IN INTERNATIONALISATION OF THE RUPEE

• India is a capital deficient country, and hence needs foreign capital to fund its growth.
• A reduced role for convertible currencies in external transactions could lead to reduced reserve accretion.
• It requires integration with global financial markets, which can pose challenges in terms of regulatory compliance, market infrastructure, and investor protection.
• There is limited liquidity in global markets making it difficult for investors to buy and sell rupee-denominated assets, which can limit the attractiveness of the currency.
• It requires a supportive regulatory environment that balances the need for openness with the need for financial stability and regulatory oversight which is challenging to achieve, especially given the complexities of global financial markets.
• Non-resident holdings of Rupees could exacerbate pass-through of external stimulus to domestic financial markets, increasing volatility.

WAY FORWARD

• Rupee internationalisation may also require an efficient swap market and a strong foreign exchange market.
• Opening up and liberalised settlements in rupee for various financial instruments both in India and overseas markets are more important.
• There is need for careful planning and coordination between policymakers, market participants, and regulators to ensure a smooth and successful transition towards the internationalisation of the Indian rupee.

CONCLUSION

Rupee has the potential to become an internationalised currency as India is one of the fastest growing countries and has shown remarkable resilience even in the face of major headwinds. Overall, increase in the international use of the Indian rupee will go a long way in positioning India as a more attractive destination for foreign investment and trade.