Globalisation of Indian rupee

Source-This post on Convertibility of Indian rupee has been created based on the article “Can the rupee go global without convertibility?” published in “Live Mint” on 10 April 2024.

UPSC Syllabus-GS Paper-3- Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context– Prime Minister has recently asked the Reserve Bank of India (RBI) to prepare a 10-year strategy to make the Indian rupee a globally “accessible and acceptable” currency. Globalisation of Indian rupee

What are the advantages of globalized currency?

1) The overseas demand for globalized currency for trade and reserves would cheapen credit within the country.

2) After attaining global currency status, there would be more demand for rupee denominated bonds. This will push their yields down, which will ensure availability of funds at lower rates.

What are the hurdles in the globalization of Indian currency?

1) Lack of full rupee convertibility– India will have to turn the rupee fully convertible to make it a global currency.Currently,Indian currency is partially convertible.

2) Asian currency crisis– Policymakers were worried after the Asian currency crisis of 1997. Many open economies suffered from capital flight. Since then, India has maintained restrictions on converting rupees into foreign currencies. There’s an annual limit on conversion and specific channels for settling commercial trades.

What steps can be taken to make to ensure globalization of Indian currency?

1) Fiscal discipline– It is important to ensure that India’s currency doesn’t lose its value due to inflation. This requires maintaining fiscal discipline.

2) Robust banking system-India needs a strong banking system that can withstand shocks. This requires transparency and efficiency throughout the financial sector.

3) External balance stability-There should be stable external balances to ensure sustainability. India must prevent its trade gap from widening due to unforeseen events

4) Role of RBI-It is important that the market sets the external value of the rupee, with the RBI playing a non-distortive role.

What should be the way forward?

1) Leveraging Technology-Technology may give RBI’s e-rupee an advantage as a central bank digital currency (CBDC) for global use. It should be designed not only for low costs but also for ensuring maximum privacy.

2) Expansion of e-rupee usage– Indian diaspora should be encouraged to use e-rupee for making low-cost cross-border transfers. However, it is important to ensure that this expansion is not affected by geopolitical sanctions.

3) Ease of programming of e-rupee– It is directly issued by RBI and doesn’t involve intermediary risks.Thus,it may attract international users if it is able to offers users an easy way to program it.For ex-for making routine payments. This is indeed one of the unique features of CBDC software.

Currently, the e-rupee is only an experiment, with online bank-to-bank UPI transfers being given too much importance.However,it’s also RBI’s best bet for a global play.

Question for practice

Highlight the significance of globalized currency? What steps can India take to make its currency a global currency?