RBI panel recommendations for internationalization of rupee

Source: The post is based on the article “RBI panel recommends measures for internationalization of rupee” published in Indian Express on 6th July 2023.

What is the News?

Reserve Bank of India(RBI) Inter-Departmental Group (IDG) has recommended several measures for Internationalization of rupee.

About RBI Inter-Departmental Group(IDG):

Reserve Bank of India(RBI) had set up an Inter-Departmental Group (IDG) under RBI Executive Director Radha Shyam Ratho.

Mandate: To review the position of the rupee as an international currency and to frame a road map for the internationalization of the domestic currency.

What is Internationalization of the rupee?

Internationalization of the rupee is a process that involves increasing use of the local currency in cross-border transactions.

What are the benefits of Internationalization of the rupee according to Inter-Departmental Group (IDG)?

The benefits are: limited exchange rate risk, lower cost of capital due to better access to international financial markets, high seigniorage benefits and reduced requirement of foreign exchange reserves.

Note: 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.

What are the drawbacks of Internationalization of the rupee according to the RBI Inter-Departmental Group (IDG)?

The RBI group has cautioned that internationalization of rupee may result in increased volatility in the rupee’s exchange rate in the initial stages.

This would further have monetary implications as the obligation of a country to supply its currency to meet the global demand may come in conflict with its domestic monetary policies, popularly known as the Triffin dilemma.

What are the RBI panel recommendations for internationalization of rupee?

– Inclusion of the rupee in SDR (Special Drawing Rights) basket. The SDR is an international reserve asset created by the IMF (International Monetary Fund) to supplement the official reserves of its member countries. The value of 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.

– Adopting a standardized approach for examining the proposals on bilateral and multilateral trade arrangements for invoicing, settlement and payment in Indian Rupees(INR).

– Opening of INR accounts for non-residents both in and outside India should be encouraged. 

– Indian payment systems should also be integrated with other countries for cross-border transactions.

– Use of the existing bilateral and multilateral payment and settlement mechanisms such as ACU (Asian Clearing Union) to internationalize the rupee.

– Inclusion of Indian Government Bonds (IGBs) in global bond indices 

– Rationalization of the foreign portfolio investor (FPI) regime to facilitate a more conducive environment for foreign investments into the Indian debt markets (both government and corporate).

– Waiver of the withholding tax for masala bond issuances.

– Expansion of the RTGS (Real Time Gross Settlement) system for settling international transactions.