{"id":251147,"date":"2023-07-07T19:00:31","date_gmt":"2023-07-07T13:30:31","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=251147"},"modified":"2023-08-28T11:35:14","modified_gmt":"2023-08-28T06:05:14","slug":"internationalisation-of-the-rupee-explained-pointwise","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/internationalisation-of-the-rupee-explained-pointwise\/","title":{"rendered":"Internationalisation of the rupee: Explained, pointwise"},"content":{"rendered":"\n\n\n\n
For\u00a07 PM Editorial<\/strong>\u00a0Archives click\u00a0HERE <\/a>\u2192<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Introduction<\/span><\/b><\/h2>\n

\u00a0<\/span>India is aiming to make the rupee a global currency. Recently, the Reserve Bank of India (RBI) released the report of Inter-Departmental Group (IDG) on Internationalisation of Indian Rupee, which has made several recommendations for internationalizing the rupee. The group was constituted by the RBI to review the current position of the rupee as an international currency and to frame a roadmap for internationalisation of the rupee. The recommendations are significant, considering the economic sanctions imposed by the US on Russia for invading Ukraine and the growing demand for <\/span>dedollarization. <\/span>Given Indian economy\u2019s status as one of the fastest-growing large economies and its ability to withstand challenges, the rupee has the potential to become an internationalized currency.<\/span>\u00a0<\/span><\/p>\n

What is currency internationalisation? <\/span><\/b>\u00a0<\/span><\/h2>\n

Currency internationalization refers to the use of a country’s currency outside its borders for transactions involving residents and non-residents. <\/span>\u00a0<\/span><\/p>\n

An international currency performs all three functions of money. As a unit of account, it is used to <\/span>invoice foreign trade <\/span><\/b>and <\/span>denominate international financial instruments<\/span><\/b> by private actors and to express <\/span>exchange rate relationships<\/span><\/b> by government. <\/span>\u00a0<\/span><\/p>\n

As a medium of exchange, it is used by private actors to <\/span>settle international economic transactions<\/span><\/b> or by governments\u00a0for <\/span>exchange market intervention <\/span><\/b>and <\/span>balance of payments (BoP) financing<\/span><\/b>. <\/span>\u00a0<\/span><\/p>\n

As a store of value, it acts as a <\/span>reserve currency <\/span><\/b>and at a private level, it is held as <\/span>capital assets<\/span><\/b>.<\/span>\u00a0<\/span><\/p>\n

Internationalisation of the rupee involves promoting the rupee for <\/span>import and export trade <\/span><\/b>and then other <\/span>current account transactions <\/span><\/b>followed by its use in <\/span>capital account transactions.<\/span><\/b>\u00a0<\/span><\/p>\n

Currently, the US dollar, the Euro, the Japanese yen and the British pound are the leading reserve currencies in the world. <\/span>\u00a0<\/span><\/p>\n

China\u2019s efforts to make its currency renminbi has met with only limited success so far.<\/span>\u00a0<\/span><\/p>\n

What is the rationale for internationalisation of the rupee?<\/span><\/b>\u00a0<\/span><\/h2>\n

Increased linkages:<\/span><\/b> Internationalisation of the currency is <\/span>closely interlinked with the nation\u2019s economic progress<\/span><\/b>. Economic growth and development over the past few decades have led to a g<\/span>reater integration<\/span><\/b> of the Indian economy with the global economy in terms of <\/span>trade and capital flows<\/span><\/b>. India\u2019s foreign exchange reserves have grown from USD 290.5 billion in August 2012 to USD 560.4 billion in August 2022. During this period, India\u2019s Foreign Direct Investment (FDI) has increased from 46.6 billion dollars to 84.8 billion dollars; imports have increased from 489.3 billion dollars to 612.6 billion dollars, and exports have grown from 306.0 billion dollars to 421.9 billion dollars. Therefore, the rupee has the potential to become an internationalized currency.<\/span>\u00a0<\/span><\/p>\n

Declining share of the dollar: <\/span><\/b>The international monetary and financial system has moved towards being <\/span>multipolar<\/span><\/b>. Various bilateral and regional economic cooperation agreements have emerged. The\u00a0<\/span>share of the dollar in foreign exchange reserves of countries is steadily declining.<\/span><\/b> Other currencies are increasingly used in trade invoicing and settlement. <\/span>\u00a0<\/span><\/p>\n

Geopolitical:<\/span><\/b> In the wake of the <\/span>sanctions imposed on Russia<\/span><\/b>, many countries have become cautious of the potential costs\u00a0if they are subjected to similar sanctions by the Western governments. China, Russia and a few other countries have become more vocal in questioning the US dollar-dominated global currency system.<\/span>\u00a0<\/span><\/p>\n

What are the recommendations of RBI panel?<\/span><\/b>\u00a0<\/span><\/h2>\n

Short term recommendations<\/span><\/b>\u00a0<\/span><\/p>\n

    \n
  1. Designing a template and adopting a <\/span>standardised approach <\/span><\/b>for examining the proposals on bilateral and multilateral trade arrangements for invoicing, settlement and payment in the rupee and local currencies.<\/span>\u00a0<\/span><\/li>\n
  2. Making efforts to enable rupee as an <\/span>additional settlement currency in existing multilateral mechanisms <\/span><\/b>such as ACU.<\/span>\u00a0<\/span><\/li>\n
  3. Encouraging opening of rupee accounts for non-residents both in India and outside India. <\/span>\u00a0<\/span><\/li>\n
  4. Integrating Indian payment systems <\/span><\/b>with other countries for cross-border transactions. <\/span>\u00a0<\/span><\/li>\n
  5. Recalibrating the foreign portfolio investor <\/span><\/b>(FPI) regime and rationalizing\/harmonizing the extant Know Your Customer (KYC) guidelines.<\/span>\u00a0<\/span><\/li>\n<\/ol>\n

    Medium term<\/span><\/b>\u00a0<\/span>recommendations<\/span><\/b>\u00a0<\/span><\/p>\n

      \n
    1. A review of taxes on <\/span>Masala bonds<\/span><\/b>. <\/span>\u00a0<\/span><\/li>\n
    2. International use of <\/span>Real Time Gross Settlement (RTGS) <\/span><\/b>for cross border trade transactions and inclusion of rupee as a direct settlement currency in the Continuous Linked Settlement (CLS) system. <\/span>\u00a0<\/span><\/li>\n
    3. Examination of <\/span>taxation issues<\/span><\/b> in financial markets to harmonise tax regimes of India and other financial centres.<\/span>\u00a0<\/span><\/li>\n<\/ol>\n

      Long term recommendation<\/span><\/b>\u00a0<\/span><\/p>\n

        \n
      1. Efforts should be made for <\/span>inclusion of the rupee in IMF\u2019s<\/span><\/b> (International Monetary Fund) <\/span>SDR <\/span><\/b>(special drawing rights) basket. <\/span>\u00a0<\/span><\/b>\u00a0<\/span><\/li>\n<\/ol>\n

        What are the benefits?<\/span><\/b>\u00a0<\/span><\/h2>\n

        For private sector<\/span><\/b>\u00a0<\/span><\/p>\n

        The benefits of currency internationalisation accrue largely to a country\u2019s private sector.<\/span>\u00a0<\/span><\/p>\n

        Firstly<\/span><\/b>, the internationalisation of currency <\/span>limits the exchange rate risks<\/span><\/b> for local exporters and importers. It is because domestic firms may be able to raise invoices and settle their exports\/imports in their local\u00a0currency. It shifts exchange rate risk to their foreign counterparts or customers.<\/span>\u00a0<\/span><\/p>\n

        Secondly<\/span><\/b>, it permits domestic firms and financial institutions to <\/span>access international financial markets<\/span><\/b> without assuming exchange rate risk. <\/span>\u00a0<\/span><\/p>\n

        Thirdly<\/span><\/b>, the internationalisation of domestic currency will offer <\/span>new profit opportunities<\/span><\/b> for domestic financial institutions to grow in the global financial market. <\/span>\u00a0<\/span><\/p>\n

        Lastly<\/span><\/b>, it will reduce the <\/span>cost of doing business<\/span><\/b>. It will motivate the existing exporters to increase their exports and investors to invest more in the exporting businesses.\u00a0New players will find it attractive to enter the exports market. Overall, it will have a positive impact on economic growth and <\/span>atmanirbhar Bharat <\/span><\/b>program of India.<\/span>\u00a0<\/span><\/p>\n

        For government<\/span><\/b>\u00a0<\/span><\/p>\n

        First, <\/span><\/b>c<\/span>urrency internationalization allows a country\u2019s government <\/span>to finance its budget deficit<\/span><\/b> by issuing domestic currency debt in international markets rather than issuing foreign currency instruments.<\/span>\u00a0<\/span><\/p>\n

        Second, <\/span><\/b>i<\/span>t also allows a government to finance part\u00a0of its <\/span>Current Account Deficit (CAD)<\/span><\/b> without using its official reserves. The current account deficit may also be financed by private capital flows from abroad, especially from the banking system, as financing in domestic currency becomes integrated globally.<\/span>\u00a0<\/span><\/p>\n

        Third<\/span><\/b>, the internationalisation of a currency reduces the requirement for the authorities to maintain <\/span>large foreign exchange reserves <\/span><\/b>in foreign currencies to manage external vulnerabilities. <\/span>\u00a0<\/span><\/p>\n

        Fourth<\/span><\/b>, it leads in <\/span>lowering the impact <\/span><\/b>of sudden stops and reversals of capital flows and enhances the ability to <\/span>repay external sovereign debt<\/span><\/b>.<\/span>\u00a0<\/span><\/p>\n

        As the international use of the rupee becomes significant, the bargaining power of Indian businesses would improve, adding weight to the Indian economy and enhancing India\u2019s global stature and respect.<\/span>\u00a0<\/span><\/p>\n

        What are the macroeconomic risks?<\/span><\/b>\u00a0<\/span><\/h2>\n

        Internationalisation of a currency may result in a <\/span>potential increase in volatility of its exchange rate<\/span><\/b> in the initial stages. This would have monetary policy 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 <\/span>Triffin dilemma<\/span><\/b>. <\/span>\u00a0<\/span><\/p>\n

        Also, it may <\/span>increase the impact of an external shock<\/span><\/b> due to the free\u00a0flow of funds into and out of the country and from one currency to another. <\/span>\u00a0<\/span><\/p>\n

        Thus, it would make the conduct of monetary policy more complex.<\/span>\u00a0<\/span><\/p>\n

        What are the challenges?<\/span><\/b>\u00a0<\/span><\/h2>\n

        International demand <\/span><\/b>for the rupee is very low. The daily average share for the rupee in the global foreign exchange market is about 1.6%, <\/span>\u00a0<\/span><\/p>\n

        The rupee is <\/span>not fully convertible<\/span><\/b> in the capital account and India\u2019s share of global exports of goods is just about 2%. This reduces the necessity for other countries to hold rupees.<\/span>\u00a0<\/span><\/p>\n

        What are the initiatives taken?<\/span><\/b>\u00a0<\/span><\/h2>\n

        Indo-Nepal Remittance Facility Scheme<\/span><\/b>: This Scheme was launched by the RBI in May 2008 as an option for cross-border remittances from India to Nepal. The Scheme leverages the NEFT ecosystem.<\/span>\u00a0<\/span><\/p>\n

        Bilateral Swap Arrangements (BSA):<\/span><\/b> India currently has a BSA with Japan as a line of support in case of any balance of payments issue. Under the South Asian Association for Regional Cooperation (SAARC) swap agreement, the requesting central bank can make withdrawals in dollar, Euro and also in rupee.<\/span>\u00a0<\/span><\/p>\n

        Developments in the GIFT City:<\/span><\/b> Gujarat International Finance Tec-City (GIFT City) was set up as India\u2019s first International Financial Service Centre (IFSC). It has the potential to develop as\u00a0a international financial centre for Rupee products and more specifically Rupee derivatives, given the fact that the Rupee derivatives are among the most traded contracts globally.<\/span>\u00a0<\/span><\/p>\n

        Indo-Iran Agreement:<\/span><\/b> An agreement was signed between India and Iran for undertaking eligible trade transactions using rupee. <\/span>\u00a0<\/span><\/p>\n

        Asian Clearing Union (ACU):<\/span><\/b> RBI had proposed the use of local currencies of members for settlement of ACU transactions and inclusion of rupee as one of the settlement currencies under the ACU. <\/span>\u00a0<\/span><\/p>\n

        Rupee as a Designated Foreign Currency in Sri Lanka:<\/span><\/b> This have paved the way for rupee-based bilateral trade between Sri Lanka and India.<\/span>\u00a0<\/span><\/p>\n

        Use of Indian Payment Infrastructure:<\/span><\/b> RBI making efforts to increase the global outreach of the UPI system to facilitate cross-border transactions. Various other initiatives have also been undertaken to facilitate cross-border payments, especially personal remittances like the Money Transfer Service Scheme (MTSS). <\/span>\u00a0<\/span><\/p>\n

        Other initiatives:<\/span><\/b> RBI has enabled external commercial borrowings in rupees. The recent\u00a0Foreign Trade Policy (FTP) 2023, proposes invoicing, payment, and settlement of trade in Indian rupees. <\/span>RBI has permitted rupee settlement of external trade through Special Rupee Vostro Accounts (SRVAs). A total of 18 countries have been allowed to open SRVAs. (A vostro account is held by a bank on behalf of a bank in another country).<\/span>\u00a0<\/span><\/p>\n

        What should be the future course of action?<\/span><\/b>\u00a0<\/span><\/h2>\n

        The RBI should pursue a <\/span>deeper and more liquid rupee bond market <\/span><\/b>to enable foreign investors and Indian trade partners to have more investment options in rupees. <\/span>\u00a0<\/span><\/p>\n

        Indian exporters and importers should be <\/span>encouraged to invoice their transactions in rupee<\/span><\/b>. For this, the trade settlement formalities for rupee import\/export transactions should be optimised.<\/span>\u00a0<\/span><\/p>\n

        Additional <\/span>currency swap agreements<\/span><\/b> (as with Sri Lanka) would further allow India to settle trade and investment transactions in rupees.<\/span>\u00a0<\/span><\/p>\n

        Tax incentives<\/span><\/b> must be given to foreign businesses to utilise the rupee in operations in India.<\/span>\u00a0<\/span><\/p>\n

        Efforts must be\u00a0made to make the rupee an <\/span>official currency in international organisations<\/span><\/b>, thereby giving it a higher profile and acceptability. <\/span>\u00a0<\/span><\/p>\n

        The<\/span> Tarapore Committees<\/span><\/b>\u2019 (in 1997 and 2006) recommendations must be pursued including a push to reduce fiscal deficits lower than 3.5%, a reduction in gross inflation rate to 3%-5%, and a reduction in gross banking non-performing assets to less than 5%.<\/span>\u00a0<\/span><\/p>\n

        Gradually, the rupee must be made <\/span>more freely convertible.<\/span><\/b> This would allow foreign investors to easily buy and sell the rupee, enhancing its liquidity and making it more attractive.<\/span>\u00a0<\/span><\/p>\n

        Sources: <\/span><\/b>Indian Express<\/span><\/a>, <\/span>The Hindu<\/span><\/a>, <\/span>Livemint<\/span><\/a>, <\/span>Business Standard,<\/span><\/a> RBI report.<\/span><\/a>\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

        For\u00a07 PM Editorial\u00a0Archives click\u00a0HERE \u2192 Introduction \u00a0India is aiming to make the rupee a global currency. Recently, the Reserve Bank of India (RBI) released the report of Inter-Departmental Group (IDG) on Internationalisation of Indian Rupee, which has made several recommendations for internationalizing the rupee. The group was constituted by the RBI to review the current… Continue reading Internationalisation of the rupee: Explained, pointwise<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[130,9],"tags":[216,8184],"class_list":["post-251147","post","type-post","status-publish","format-standard","hentry","category-7-pm","category-public","tag-gs-paper-3","tag-indian-economy","entry"],"jetpack_featured_media_url":"","views":{"total":73,"cached_at":1698371579,"cached_date":1698477831},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/251147","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=251147"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/251147\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=251147"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=251147"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=251147"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}