Q. With reference to the Internationalization of the currency, consider the following statements:
1.Internationalization of the currency can lower seigniorage benefits.
2.Currency internationalization has an impact on the effectiveness of various monetary policy instruments.
3.Internationalization of rupee may result in increased volatility in the rupee’s exchange rate in the initial stages.
Which of the statements given above is/are correct?
Explanation –
Statements 1 is incorrect. Internationalization of the currency can lead higher seigniorage benefits because there will be a greater number of currencies printed. Seigniorage is the difference between the value of currency/money and the cost of producing it. It is essentially the profit earned by the government by printing currency.
Statements 2 and 3 are correct. Currency internationalization has an impact on the effectiveness of various monetary policy instruments. For example, the effectiveness of open market operations as an instrument for influencing interest rate and money supply is likely to reduce in an environment where residents and non-residents are free to buy and sell domestic currency. The RBI group has cautioned that internationalization of rupee may result in increased volatility in the rupee’s exchange rate in the initial stages.
Source: ForumIAS
