Internationalization of Rupee

Context:  An Inter Departmental Group (IDG) of officials of the Reserve Bank of India (RBI) have in a report cautioned that internationalization may result in increased volatility in the rupee’s exchange rate in the initial stages. About Inter-Departmental Group (IDG): 

• The Inter-Departmental Group (IDG) was constituted by the RBI Deputy Governor.
• Objective: 
  • To review the position of the rupee as an international currency
  • To frame a road map for the internationalisation of the domestic currency.

Key Recommendations of the Group:

• Inclusion of the rupee in the Special Drawing Rights (SDR) basket, which is an international reserve asset created by the IMF to supplement member countries’ official reserves.
  • The value of the 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.
• Recalibration of the foreign portfolio investor (FPI) regime to accelerate the pace of internationalisation of the rupee.
• Adoption of a standardised approach or uniform template for examining proposals involving bilateral and multilateral trade agreements/arrangements for invoicing, settlement, and payment in the rupee and local currencies of counterpart countries.
• Use of existing bilateral and multilateral payment and settlement mechanisms, such as the Asian Clearing Union (ACU), to internationalise the rupee.
• Allowing non-residents to open rupee accounts to facilitate the internationalisation of the currency.
• Expansion of the Real-Time Gross Settlement (RTGS) system for settling international transactions.
• Inclusion of the rupee in the Continuous Linked Settlement (CLS) system.
  • CLS is a global initiative to reduce foreign exchange settlement risk by settling both legs of foreign exchange transactions simultaneously.

Internationalisation of Rupee:

• Internationalisation of Rupee refers to the process of increased cross-border transactions of Indian currency, especially in import-export trades followed by other current account transactions and then capital account transactions.
• This would enable the international settlement of trade in Indian rupees in foreign trades, as opposed to other currencies including US dollars.

Efforts to Internationalise Rupees: 

• The Reserve Bank of India (RBI), in 2022, allowed the settlement of foreign trades between partner countries in Indian currency.
• It was announced in the backdrop of continuous weakening of rupee against the US dollar and the sanctions put on Iran and Russia by the United States on the use of their currency for transactions.
• Foreign Trade Policy 2023 also aims to push towards internationalisation of Rupee in foreign trades.
• India had the rupee arrangements with Bhutan and Nepal for a long time and recently Sri Lanka decided to formally include the rupee as a designated foreign currency.

Benefits of Internationalisation of Rupee:

• Limited exchange rate risk
• Lower cost of capital due to better access to international financial markets
• High seigniorage benefits
• Reduced requirement of foreign exchange reserves.
• Ability to insulate from payment disruptions caused by events like the Russia-Ukraine war.

Implications of Internationalisation:

• It would have monetary implications as the obligation of a country to supply its currency to meet the global rency to another.
• The internationalisation of a currency may accentuate an external shock, given the open channel of the flow of funds into and out of the country and from one currency to another.
• India will need to run continuous current account deficits in order to provide more and more liquidity needed by an expanding world economy, making it increasingly indebted over time.
• There could be conflicts of interest between short-term domestic and long-term international economic objectives.

News Source: Indian Express