INTERNATIONALIZATION OF RUPEES – ECONOMY
News: Internationalization
of rupee: Why and what are the benefits?
What's in the news?
● India
is aiming to make the rupee a global currency.
● Pushing
for a roadmap towards the internationalization 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 internationalized
currency.
Why the recent surge?
● The
report comes against the backdrop of the
Russia-Ukraine war, the subsequent imposition of sanctions and the
weaponization of the financial system which has led to apprehensions over excessive reliance on the dollar,
leading to calls for diversification.
Internationalization of the Rupee:
● Internationalization
is a process that involves increasing
the use of the rupee 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.
● The
internationalization of the currency, which is closely interlinked with the
nation’s economic progress, requires further opening up of the currency
settlement and a strong swap and forex market.
Leading Reserve Currencies in the World:
● Currently,
the US dollar, the Euro, the Japanese yen and the pound sterling are the
leading reserve currencies in the world.
● China’s
efforts to make its currency renminbi has met with only limited success so far.
Advantages of Internationalization of Rupees:
For
an economy like India, the advantages from greater usage of its currency in
international transactions are manifold.
1. Reduce Exchange Rate Risk:
● It
brings down the “exchange rate risk” for Indian exporters and importers, while
curtailing the demand for US dollar.
2. Reduces Forex Need:
● Internationalization
of the rupee reduces the need for holding foreign exchange reserves.
● It
also reduces the need to maintain a forex war-chest in order to “manage
external vulnerabilities”.
3. Reduce Economic Vulnerabilities:
● Reducing
dependence on foreign currency will make India less vulnerable to external
shocks.
● It
makes the economy less at risk to “sudden stops and reversals of capital
flows”.
4. Paves way for Indian Businesses:
● The
use of the rupee in cross-border transactions mitigates currency risk for
Indian businesses.
● Protection
from currency volatility not only reduces the cost of doing business, it also
enables better growth of business, improving the chances for Indian businesses
to grow globally.
5. Increases India’s Global Stature:
● As
the use of the rupee becomes significant, the bargaining power of Indian businesses would improve, adding weight
to the Indian economy and enhancing India’s global stature and respect.
Concerns of Internationalization of Rupees:
1. Lower Demand for Rupee:
● International
demand for the rupee is very low.
● The
daily average share for the rupee in the global foreign exchange market is
about 1.6%.
2. Global Fluctuations and Higher Costs:
● If
the rupee becomes more widely traded, it will be more susceptible to
fluctuations in global financial markets.
● This
could make it more difficult for businesses and investors to plan their
financial activities, and could lead to higher transaction costs.
3. Increased Risk of Capital Flight:
● If
the rupee becomes more widely held by foreign investors, there is a greater
risk that they could suddenly sell their holdings and withdraw their capital from India.
4. Increased Vulnerability to External Shocks:
● If
the rupee becomes more integrated with global financial markets, it will be
more vulnerable to external shocks, such as changes in interest rates or commodity prices.
● This
could lead to economic instability in India.
5. Reduced Monetary Policy Autonomy:
● The
Reserve Bank of India (RBI) would have less control over the value of the rupee
if it were more widely traded.
● This
could make it more difficult for the RBI to manage inflation and other
macroeconomic variables.
Reforms needed to make Rupee as an International
Currency:
The
working group, led by RBI Executive Director Radha Shyam Ratho, has put forward
several recommendations to expedite the internationalization of the rupee such
as
1. Full Capital Account Convertibility:
● It
will require full convertibility of the currency on the capital account and cross-border transfer of funds without any
restrictions.
○ India
has allowed only full convertibility on the current account as of now.
● Encouragement
of the opening of rupee accounts for non-residents, both within and outside
India.
2. Making Uniform Approaches:
● India
needs to place a uniform approach for dealing
with trade arrangements “for invoicing, settlement and payment in the rupee
and local currencies.
3. Incentivizing Exporters:
● Incentivizing
exporters to use the Indian currency for trade settlement paves way for
increasing use of rupees in the international trade regime.
4. Integrating Payment System:
● India
needs to integrate payment systems to provide seamless cross-border
transactions.
● Promotion
of the international use of Real-Time
Gross Settlement (RTGS) for cross-border trade transactions.
5. Synchronization:
● India
needs to synchronize its tax regimes and other financial centers, and allow its
banking services in the rupee outside the country.
● It
also called for the review of taxes on
masala (rupee-denominated bonds issued outside India by Indian entities) bonds.
6. Global Measures to include Rupee in IMF’s SDR
Basket:
● The
long-term objective of India is to include the rupee in the IMF’s SDR (special
drawing rights) basket for making it as a global reserve currency.
7. 24*5 Rupee Market:
● The
group suggested strengthening the financial market by fostering a global
24×5rupee market and recalibration of
the FPI (foreign portfolio investor) regime.
The
Internationalization of Rupee is a delicate
balance between convertibility and exchange rate stability, and its
realization can significantly benefit Indian citizens, enterprises, and the
government’s financial objectives.