What is
internationalization of rupee?
Internationalization is a process that involves increasing the use of the rupee in cross-border transactions.
Why is the US dollar the most used international currency?
1. Size of the US
economy
2. Extend &
reach of its trade and financial networks
3. Depth and
liquidity of US financial markets
4. Consistency of
macroeconomic stability and currency convertibility.
5. Long-term
resilience, integrity, transparency, openness and stability of the US economy.
Relevance of
push for internationalization of Rupee:
1. Potentiality of
Indian Rupee
● The Reserve
Bank of India’s (RBI) inter-departmental group (IDG)
remarked that rupee has the potential to
become an international currency and flagged off expectations for a new roadmap
for rupee as a global currency.
●
IMF in
2021: Indian rupee is one of the five emerging market currencies with
significant regional importance and economic weight.
2. Threat of
economic sanctions
○
The Russia-Ukraine war led imposition of
sanctions has given a wake up call to other countries against dependence of the
US dollar-dominated global currency system & dominant international payment
mechanisms based on the Society for Worldwide Interbank Financial Telecommunications
(SWIFT) messaging system.
Functions to be
performed by an international currency: To act as
1. A medium of
exchange as an intermediary between the buyer and seller - used to settle private international
economic transactions, financing Balance of Payments and accessing foreign
exchange markets.
2. An account or
Measure acting as a common denominator to measure values of other currencies.
3. A Standard of
deferred payments in such a way that the currency will be accepted to make purchases in the present and pay in the future.
4. A Store of
value that will be accepted & held by Central banks and monetary authorities as reserve assets.
Advantages of
internationalization of Rupee:
1. It limits the
exchange rate risks associated with transactions.
·
Indian firms can borrow in dollars and repay
in rupees in international financial
markets without exposing to foreign exchange risks.
·
It reduces the cost of doing business and
fosters better growth of business, leaving better chances for Indian companies
to grow globally.
2. Benefits to
Indian government
·
Not required to hold huge forex in the form
of multiple currencies (Chinese Renminbi,Euro, dollar, pound & Yen
-constitutes 88.7% of forex) by the
RBI, as no interest is earned on it by thegovernment.
3. Reduced
dependence on foreign currency will make India less susceptible to external shocks.
4. With rupee
gaining a stronghold in the global economy, the bargaining power of Indian businesses shall increase adding
weight to the Indian economyandimproving India’s global stature & respect.
Challenges:
1. Concern of
Trade deficit
·
E.g.: In
2022-23, the oil trade between India & Russia using domestic
currency led to surplus of rupees in Russian banks (as imports worth
$49billion far exceeded exports worth $3billion).
This surplus supply of rupees may erode the confidence in the currency &
pose a threat to its existence as an international currency.
2. Internationalization
of rupee can intensify external shocks affecting the domestic economy due to free flow of funds across borders and currencies.
How can
internationalization of Rupee be achieved?
By implementing short term and long-term
policies, that include
1. Use of Rupee in
cross-border transactions.
2. Promoting the
rupee for import and export trade followed by Current Account transactions
& then Capital account transactions. (by opening of the rupee accounts for
non-residents both in India and outside India + integrating Indian payment systems with other
countries for cross-border transactions).
3. Further opening
up of the currency settlement, a strong swap and forex market.
4. Full
convertibility of the rupee in Capital account and cross-border transfer of
funds without any restrictions. (India has currently allowed full
convertibility on the current
account alone)
5. International
use of Real Time Gross Settlement (RTGS) for cross-border trade transactions
6. Inclusion of Indian Government Bonds in global bond indices.
7. As a long-term measure, inclusion of the rupee in IMF’s (International Monetary Fund) SDR (special drawing rights).
