What is Internationalisation of Rupee? Why is the need for Internationalisation of Rupee? What are the various advantages of Internationalisation of the Rupee? What are the Challenges in Internationalisation of Rupee? Read here to know more about it.
The Foreign Trade Policy (FTP) has recently undergone revisions by the Central government to enable rupee settlement of foreign trade for export development initiatives.
The modifications suggest that export payments made in Indian rupees are eligible for the incentives and can fulfil their export requirements under the FTP. The government has emphasised that this was done in response to the growing demand for the Indian Rupee to be internationalised.
Also read: Currency Carry Trade
What is Internationalisation of Rupee?
The process of internationalising the rupee entails using it more frequently in cross-border transactions.
Before moving on to capital account usage, it comprises promoting the use of the rupee in import and export trade as well as other current account operations.
While only partially convertible in the capital account, the rupee is fully convertible in the current account. A currency (in this case, the rupee) might obtain more acceptance (credibility) around the world by adopting complete capital account convertibility, or the freedom to convert domestic financial assets into foreign financial assets and vice versa.
Why is the need for Internationalisation of Rupee?
- In the early 1960s, Malaysia, Qatar, the United Arab Emirates, Kuwait, Bahrain, and Bahrain accepted the rupee as legal tender.
- Only 1.7% of global foreign exchange market turnover is accounted for by the rupee, 86% of India’s imports and exports are currently priced in US dollars. underscoring the need to strengthen the currency significantly if it is to achieve recognition outside.
- The dollar represents 3.1 times more of the world’s exports and the United States does 4.7 times more of the world’s imports when used as a currency for invoices.
- The dollar’s exorbitant advantages as a global reserve currency include protection from Balance of Payments crises since the USA can finance its foreign deficits with its own currency.
- In India, the rupee can currently be converted into any other currency for imports and exports. However, India’s capital account is not entirely convertible. Equity, outside commercial borrowings, and debt owned by governments and enterprises are all subject to restrictions.
- Due to excessive reliance on dollars, global inflation, and economic challenges, the rupee has fallen to an all-time low. If the rupee were to become a world currency, India wouldn’t have to rely on US dollars for its trade.
What are the various advantages of Internationalisation of the Rupee?
- Currency risk is reduced for Indian enterprises when using the rupee in international dealings. It is the ability to effectively build a business while being protected from currency volatility which will increase the likelihood that Indian companies will expand internationally.
- De facto domestic tightening occurs as a result of excessive foreign currency liabilities of domestic businesses. Significantly lessening one’s exposure to currency risk would lessen the impact of capital flow reversals.
- The requirement for maintaining foreign exchange reserves decreases. Reserves have an impact on the economy even though they help control exchange rate volatility and project external stability.
- India becomes less susceptible to outside shocks by reducing its reliance on foreign money.
- Improved rupee acceptability and commerce would give Indian companies more negotiating leverage, which would weigh down the Indian economy and raise India’s standing and respect around the world. This would allow India to diversify its trading basket and avoid western sanctions and limitations. To avoid sanctions:
- The value of the rupee will increase with its internationalisation. In other words, it will increase demand for the rupee in global trade. According to the changing macroeconomic circumstances and demands of the Indian financial, industrial, and individual sectors, the capital account is being gradually liberalised.
What are the Challenges in Internationalisation of Rupee?
- India lacks sufficient capital, hence foreign investment is required to finance its economic expansion. 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. Large holdings of these financial assets may make a country more vulnerable to foreign shocks, and addressing that susceptibility would require more efficient policy measures.
- Reduced reserve accretion can result from a smaller role for convertible currencies in international transactions. However, if the trade deficit is financed in rupees, the requirement for reserves would also decrease.
- 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.
- Having an effect on monetary policy. The country’s ability to develop a monetary strategy tailored to the needs of its regional economy will be constrained by the internationalisation of the rupee.
- It results in the Trilemma of an open economy, which states that no nation can pursue the objectives of unrestricted capital flow, stable exchange rates, and independence from external financial influence at the same time.
- Increased refinancing risk as a result of the rupee holdings of non-residents worsening the risks associated with the external stimulus that is transferred to local financial markets.
- Increased volatility of the rupee’s exchange rate (value) in the event that global inflation exceeds local inflation or as a result of unchecked capital flows.
- As inflation that is higher than the worldwide rate undercuts the use of a currency as an international medium of exchange and a store of value, it goes against the requirement of price stability before the internationalisation of a currency.
- Increased accountability for upholding the integrity of the global financial and monetary system, or increased responsibility for acting as the “Lender of Last Resort.”
What are the Steps taken for the Internationalisation of the Rupee?
- The RBI established a system to simplify cross-border transactions in rupees in July 2022, enabling foreign commercial borrowings in rupees, particularly in the case of masala bonds.
- The Asian Clearing Union is also looking into a plan to settle transactions using local currencies. A bilateral or trading bloc agreement that gives each country’s importers the option to pay in their own currency is likely to be favoured by all parties, therefore it is worthwhile to investigate.
- The viability of the internationalised rupee can be tested by utilising bilateral and multilateral trade agreements, such as using the Vostro account for rupee trading with Russia and Iran.
- Financial fundamentals improvements and actions to raise sovereign credit ratings.
- To encourage the Indian Rupee’s internationalisation, the government has been taking action. A structure enabling the issuing of rupee-denominated bonds by Indian corporations abroad was recently established, resulting in large savings in Indian foreign reserves.
UPSC Civil Services Examination Previous Year Question
Q. Convertibility of rupee implies (2015)
(a) being able to convert rupee notes into gold
(b) allowing the value of rupee to be fixed by market forces
(c) freely permitting the conversion of rupee to other currencies and vice versa
(d) developing an international market for currencies in India
Q. With reference to Balance of Payments, which of the following constitutes/constitute the Current Account? (2014)
- Balance of trade
- Foreign assets
- Balance of invisibles
- Special Drawing Rights
Select the correct answer using the code given below:
(a) 1 only
(b) 2 and 3
(c) 1 and 3
(d) 1, 2 and 4
Article written by Aseem Muhammed