In recent years, there has been a growing interest in the internationalization of the Indian Rupee (INR). India's aim to establish the rupee as a global currency has gained significance against the backdrop of economic sanctions imposed by the US on Russia and the increasing quest for an alternative to the US dollar in international transactions. This blog aims to provide UPSC aspirants with an overview of the concept of internationalization, its advantages, challenges, and the recommended roadmap proposed by the Reserve Bank of India (RBI) for achieving this objective.
Understanding the Internationalisation of the Rupee
Internationalization of a currency refers to the process of increasing its use in cross-border transactions. For the rupee, this would involve promoting its usage in import-export trade, current account transactions, and eventually capital account transactions. Currently, the US dollar, the Euro, the Japanese yen, and the British pound sterling dominate as leading reserve currencies worldwide. However, India aims to position the rupee as a viable alternative to these currencies.
Advantages of Internationalisation
1. Mitigating currency risk: The use of the rupee in cross-border transactions reduces currency volatility, which benefits Indian businesses by lowering the cost of doing business and fostering better growth opportunities.
2. Reducing dependence on foreign exchange reserves: Internationalisation of the rupee decreases the need for holding foreign currency reserves, making India less vulnerable to external shocks and reducing associated costs on the economy.
3. Enhancing bargaining power: Increased use of the rupee elevates the bargaining power of Indian businesses, strengthening the Indian economy and elevating India's global stature.
Challenges and Concerns
1. Initial exchange rate volatility: The internationalization of the rupee may result in increased exchange rate volatility in the initial stages, potentially conflicting with domestic monetary policies and posing the "Triffin dilemma."
2. Impact on financing conditions: International currency use can influence financing conditions in ways that may be undesired or require careful management.
3. Incremental progress and associated concerns: The process of internationalization is gradual and requires continuous change. It necessitates addressing concerns and challenges that may arise along the way.
Recommended Roadmap by the RBI
The RBI's inter-departmental group has proposed a roadmap to accelerate the internationalization of the rupee. The key recommendations include:
1. Short-term measures:
Adoption of a standardized approach for examining proposals on bilateral and multilateral trade arrangements, encouraging invoicing, settlement, and payment in the rupee and local currencies.
Opening rupee accounts for non-residents both in India and abroad.
Integration of Indian payment systems with other countries for cross-border transactions.
Strengthening the financial market by fostering a global 24x5 rupee market and recalibrating the foreign portfolio investor (FPI) regime.
2. Medium-term measures (next two to five years):
Reviewing taxes on masala bonds (rupee-denominated bonds issued outside India by Indian entities).
Promoting the international use of Real-Time Gross Settlement (RTGS) for cross-border trade transactions.
Inclusion of Indian Government Bonds in global bond indices.
3. Long-term measure:
Pursuing efforts for the inclusion of the rupee in the International Monetary Fund's (IMF) Special Drawing Rights (SDR), a basket of reserve currencies.
Conclusion
The internationalization of the Indian rupee holds significant potential for India's economic growth and global standing. While challenges such as exchange rate volatility and impact on financing conditions need to be addressed, the advantages, including reduced currency risk and enhanced bargaining power, outweigh the concerns. The proposed roadmap by the RBI provides a framework for gradually achieving the internationalization objective. As UPSC aspirants, understanding these developments is crucial for gaining insights into India's economic aspirations and its efforts to establish the rupee as a global currency.
Disclaimer: The views expressed in this blog are based on the RBI's inter-departmental group's recommendations and do not necessarily represent the official position of the Reserve Bank of India.
Note for UPSC Aspirants: For UPSC aspirants interested in exploring further, here are some keywords to guide your research: Currency volatility, Cross-border transactions, Foreign exchange reserves, Financial market integration, Special Drawing Rights (SDR)
Source: Indian Express | The Hindu
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