Internationalization of rupee

 India is aiming to make the rupee a global currency.

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. These are all transactions between residents in India and non-residents. The internationalisation 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.

More importantly, 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.

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.

The relevance

Currently, the US dollar is said to enjoy an ‘Exorbitant Privilege’,

The dollar’s position is supported by a range of factors, including the size of the US economy, the reach of its trade and financial networks, the depth and liquidity of US financial markets, and a history of macroeconomic stability and currency convertibility. Dollar dominance has also benefited from the lack of viable alternatives.

According to the RBI’s working group, the obvious challenger to the US dollar dominance is the Chinese Renminbi. However, its ability to rival the US dollar will depend on future policies in both the US and China and the ability of the Chinese economy and its financial system to demonstrate the same long-term resilience, integrity, transparency, openness and stability, which are characteristics of the US economy.

While the Asian crisis of 1997-1998 underscored the necessity of emerging market economies having strong foreign exchange reserves to manage external shocks, in an increasingly polarised world, it no longer seems a sufficient defence against the threat of economic sanctions.

Advantages of internationalisation of the rupee

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.

While reserves help manage exchange rate volatility and project external stability, they impose a cost on the economy. Internationalisation of the rupee reduces the need for holding foreign exchange reserves. Reducing dependence on foreign currency will make India less vulnerable to external shocks.

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.

The recommendations

For the short term, the group has suggested adoption of a standardised approach for examining the proposals on bilateral and multilateral trade arrangements for invoicing, settlement and payment in the rupee and local currencies, encouraging the opening of the rupee accounts for non-residents both in India and outside India and integrating Indian payment systems with other countries for cross-border transactions.

Over the next two to five years, the group has recommended a review of taxes on masala (rupee-denominated bonds issued outside India by Indian entities) bonds, international use of Real Time Gross Settlement (RTGS) for cross-border trade transactions and inclusion of Indian Government Bonds in global bond indices.

For the long term, the group has recommended that efforts should be made for the inclusion of the rupee in IMF’s (International Monetary Fund) SDR (special drawing rights). The SDR is an international reserve asset created by the IMF 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.

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