News Highlight
Rupee Internationalisation: the Indian rupee is going global and drawing interest from more nations.
Key Takeaway
- India’s rupee trade settlement mechanism, set up by the Reserve Bank of India in July 2022, is attracting interest from more countries apart from Russia.
- The technique allows for the use of rupees in place of dollars.
- Multiple major currencies are used for international transactions to advance global trade with a focus on Indian exports.
- Additionally, it supports the rupee’s increasing appeal to the world market.
Internationalisation of rupee
- About
- Increased use of the local currency in overseas transactions is a phenomenon known as rupee internationalisation.
- Currently, the rupee makes up less than 1.7% of global trade, compared to the dollar’s 88% share.
- The rupee is fully convertible in India for transactions like imports and exports.
- India’s capital account is not fully convertible, though.
- There are limits on equity, external commercial borrowings, and debt held by governments and corporations.
- Need for Internationalisation
- Firstly the dollar accounts for 88.3% of global foreign exchange market turnover, followed by the euro, Japanese Yen and Pound Sterling.
- The rupee accounts for a mere 1.7%, underlining the need to push the currency much further to get an international tag.
- The RBI has given domestic traders the option of paying their import-export invoices in rupees.
- Advantages of Internationalisation
- Currency appreciation: this will increase demand for the rupee in global trade.
- Reduce exchange rate volatility: payments made in rupees can aid in lowering the price volatility linked to dollars.
- In addition, making significant savings in Indian foreign reserves.
- Avoid sanctions: By avoiding the limitations and penalties imposed by the west, India can diversify its trade basket by increasing acceptance and trading in rupees.
- Furthermore, it boosts its stature as a major economic force on the planet.
Challenges in the Internationalisation of the Rupee
- Firstly, India lacks sufficient capital; foreign investment is required to finance its economic expansion.
- Furthermore, if a sizable amount of its trade is conducted in rupees, non-residents would have rupee balances in India that they could use to buy assets there.
- Extensive holdings of these financial assets may increase sensitivity to external shocks, requiring more efficient regulatory measures to manage.
- Reduced reserve accretion can result from a smaller role for convertible currencies in international transactions.
- However, the reserve requirement would also decrease if the trade deficit is financed in rupees.
- Rupee holdings by non-residents could make it more difficult for external stimulus to spread to domestic financial markets, raising volatility.
- For instance, non-residents may convert their Rupee assets and leave India if the world enters a phase of reduced risk.
Actions required for rupee internationalisation
- The RBI introduced a system to ease cross-border rupee transactions in July 2022.
- It enables foreign commercial borrowings in Indian rupees (especially Masala Bonds).
- To accomplish capital account convertibility, India must open its currency.
- The viability of the internationalised rupee can be tested via bilateral and multilateral trade agreements.
- Such as the Vostro account for rupee commerce with Russia and Iran.
- Improvements to the financial fundamentals and actions to raise sovereign credit ratings.
Way Forward
- An effective swap and robust foreign exchange market may also be necessary for rupee internationalisation.
- The rupee’s confidence will increase as the economy’s fundamentals continue to improve, the banking sector continues to be healthy, and sovereign ratings go higher, preparing the currency for the next leg of its international journey.
Pic Courtesy: The Hindu
Content Source: Times of India