Why in the news?
The RBI and Bank of Mauritius signed an MoU to promote local currencies in cross-border transactions, supporting the internationalisation of the Indian rupee. Also,(RBI) liberalized FEMA regulations, in 1999 to encourage the use of the Indian Rupee for cross-border transactions.
What is the Internationalisation of the Rupee?
- Internationalization of the Rupee refers to a process that involves increasing the use of the rupee in cross-border transactions.
- It promotes the rupee for international trade and other current account transactions, followed by its use in capital account transactions.
Benefits of Internationalisation of Rupees
- Reduces Vulnerability: Reducing dependency on foreign currencies (particularly the dollar), will shield the economy from sudden exchange rate fluctuations, currency crises, and inflationary pressures.
- Limits Exchange Rate Risks: Currency volatility protection reduces the cost of doing business. It also enables better growth of business, ameliorating the chances for Indian businesses to grow globally.
- Reduces Requirement of Forex Reserves: It reduces the requirement to maintain and depend on large foreign exchange reserves in convertible currencies to manage external vulnerabilities.
- Deficit Financing: A globally accepted RUPEE will allow the Indian government to give loans in its own currency to international investors, making it easier to manage fiscal deficits without exchange rate risks.
- Strengthening India’s Financial Markets: Greater global demand for INR increases foreign participation in Indian financial markets, such as bonds and equity bringing in long-term investments.
Challenges in the Internationalisation of the Rupee
- Exchange Rate Volatility: It may result in a potential increase in volatility of its exchange rate in the initial stages.
- Monetary Policy Dilemma or Triffin Dilemma: Create a Triffin Dilemma, wherein a country struggles to balance global currency demand with domestic monetary needs.
- Restricted Convertibility: At present INR is fully convertible in the current account but partially in the capital account which limits its global appeal.
- Risk to External Shock: An open channel of the flow of funds in and out of the country can increase the volatility of the financial system.
- Lack of Global Usage: INR is not widely used in global trade compared to USD, EUR, etc. Moreover, it lacks deep liquidity in international forex markets, restricting large-scale transactions.
Steps Taken for Internationalisation of Rupee
- Internationalization of Indian Payment Infrastructure: UPI is currently in use in Singapore, France, UAE, Sri Lanka, Bhutan, Mauritius, Nepal etc.
- Memorandum of Understanding (MoU): MoU with the central banks of the UAE, Indonesia and Maldives is signed to encourage cross-border transactions in local currencies, including Indian Rupee.
- RBI’s Strategic Action Plan for 2024-25: RBI unveiled a Strategic Action Plan for 2024-25 to promote the internationalization of the rupee. It includes- (a) Permitting the Opening of INR Accounts outside India and extending INR-denominated loans to persons resident outside India (PROI). (b) Implementation of the SPECTRA Project: SPECTRA (Software Platform for ECBs and Trade Credits Reporting and Approval) software platform of RBI. It streamlines the approval and reporting process for External Commercial Borrowings (ECB) as well as Trade Credits.
- Special Vostro Rupee Accounts (SVRAs): RBI has enabled INR trade settlement with 22 countries by allowing banks to open SVRAs.
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Way Forward (Recommendations of Inter‐Departmental Group of RBI)
- Internationalization of Indian Payment Systems: Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT), UPI, etc.
- Inclusion of INR in Continuous Linked Settlement (CLS): CLS is a global system for the settlement of foreign currency transactions on a Payment vs Payment (PvP) basis. It currently settles trades in 18 currencies.
- Currency Swaps & Local Currency Settlement (LCS): It stabilizes local currency, protects businesses against currency risk exposure & reduces transaction costs.
- Inclusion of Ruppee to Special Drawing Rights (SDR) basket: It is an international reserve asset, that supplements its member countries’ official reserves.
- Strengthening Financial Markets: Harmonisation of KYC norms of RBI and SEBI to ease access of foreign investors to INR assets.
- Global 24×5 INR market: Customer transactions are happening round-the-clock in the offshore market. But, when it comes to the interbank market, it operates only for a limited set of hours onshore.
- Inclusion of Indian Government Bonds in Global Bond Indices: It will enable the widening of the investor base and stable passive flows. Apart from this appreciation of INR, and reduction in overall borrowing costs will also be there.
Conclusion
The Tarapore Committee’s recommendations, along with reduced fiscal deficits, inflation rates, and banking non-performing assets, will ensure our desired goal. Also, advocating for the rupee to become an official currency in international organizations would raise its profile and acceptance.