| Introduction: Describe the context of the internationalization of the Indian Rupee. Body: What measures are proposed by the group and what are the benefits and challenges of the Internationalization of the rupee? Conclusion: Way forward. |
Recently, RBI constituted the Inter-Departmental Group to frame a road map for the internationalization of the Indian rupee. The need for the internationalization of the rupee comes in 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.
What measures are proposed by the group?
- Uniform approach: The group suggested that there should be a coherent and standardized approach to dealing with trade arrangements regarding invoicing, settlement, and payment in the rupee and local currencies. The group suggested incentives to exporters for rupee trade settlement.
- Taxation reforms: It also suggested reviewing tax on Masala bonds and harmonizing taxation issues in the financial markets of India with global its global counterparts. It suggested strengthening the financial market by fostering a global 24×5 rupee market and recalibration of the FPI (foreign portfolio investor) regime.
- Banking reforms: it suggested the need to provide seamless cross-border transactions, international use of RTGS for cross-border transactions, and allow banking services in rupees outside India through offshore branches of Indian banks.
- IMF reforms: The panel has also suggested that India should use its economic clout and diplomacy for currency’s inclusion in International Monetary Fund’s (IMF) Special Drawing Rights (SDR) basket. The Indian rupee can also be used as an additional settlement currency in institutions like Asian Clearing Union (ACU).
What are the benefits and challenges of the internationalization of the Indian Rupee?
- Mitigates currency risk: the biggest beneficiaries are the business sector as they are guarded against exchange rate risk and provide a cushion against currency volatility enabling business growth and expanding business globally.
- Reduce the need for FOREX: Reserves have an impact on the economy even though they help control exchange rate volatility and project external stability. The requirement for maintaining foreign exchange reserves decreases with the internationalization of the rupee. India will be less susceptible to outside shocks if its reliance on foreign money is reduced.
- Partial convertibility of Rupee: A major challenge is the currency’s partial convertibility. Advanced economies currencies are fully convertible and the exchange rate is left to market factors without any regulatory intervention which is not the case with India.
- Share in global exports: Various countries have expressed reservations about the use of Indian currency as India is still not considered a major exporter on the world stage with only a 2% global share of exports.
- Global influence: With the internationalization of the rupee there will be a significant uptick in Indian business with more presence of India’s exports on the world stage and an increase in influence of India Inc. This will add to India’s global status and respect.
Conclusion:
Recently, External Affairs Minister S. Jaishankar called for the promotion of “economic decentralization that is so essential to political decentralization”, which suggests that the time is ripe for RBI to take strong steps and conscious efforts for pushing internationalization of the rupee in the global economic system.
