RUPEE INTERNATIONALIZATION

RUPEE INTERNATIONALIZATION

CONTEXT:

• Recently, RBI-appointed panel has presented a roadmap to increase the use of the rupee for cross-border transactions.

WHAT IS CURRENCY INTERNATIONALIZATION ?

• Internationalization means using a currency for cross-border transactions, including for purchase of goods, services or financial assets by non-residents.
• An international currency can be used by private players to settle trade or by governments to intervene in currency markets and financing balance of payments.
• It can also be used as a reserve currency or as capital assets by private players.
• The process is closely interlinked with the size of an economy and the scale of trade.
• Currently, the US dollar, the Euro, the Japanese yen and the British pound are the leading reserve currencies in the world.

BENEFITS OF CURRENCY INTERNATIONALIZATION:

• Economically, it enlarges the sphere of the market in which they can participate, without the need to exchange currencies and incur the related transaction costs.

CREDITS: MONEYCONTROL

• It provides more certainty to residents, who can denominate foreign transactions in their home currency.
• They can also borrow in foreign markets without incurring exchange rate risk, potentially enabling them to find cheaper funding.

REQUIREMENTS FOR CURRENCY INTERNATIONALIZATION:

• The Bank for International Settlements (BIS) highlights some important characteristics that need to be in place for internationalization.
• The most critical is that the government of the issuing country has no restrictions on the purchase or sale of that currency by any entity.
• Secondly, exporters, whether from the country concerned or others, must be able to invoice some, if not all, of their exports in that currency.
• Third, a range of entities, including private and official companies and banks as well as individuals, should be able to hold the amounts they desire.
• If enough is held by foreign central banks, then the currency will become a reserve currency.
• Finally, both domestic and foreign firms and institutions should be able to issue marketable instruments in that country’s currency, irrespective of the place of issue.

INDIAN RUPEE INTERNATIONALIZATION:

• Internationalisation is a process that involves increasing the use of the rupee in cross-border transactions.
• It involves promoting the rupee for import and export trade and then other current account transactions, followed by its use in capital account transactions.
• These are all transactions between residents in India and non-residents.
• The internationalisation of the currency, which is closely interlinked with the nation’s economic progress, requires further opening up of the currency settlement and a strong swap and forex market.
• More importantly, it will require full convertibility of the currency on the capital account and cross-border transfer of funds without any restrictions.
• India has allowed only full convertibility on the current account as of now.

RELEVANCE OF RUPEE INTERNATIONALIZATION:

• The use of the rupee in cross- border transactions helps the country’s exporters and importers to reduce transaction cost and limit exchange rate risks.
• It also helps lower the cost of capital due to better access to global financial markets and reduces the need to maintain foreign exchange reserves.
• Internationalization could allow the government to finance part of its budget deficit by issuing domestic currency debt in international markets rather than issuing foreign currency instruments.
• It could also allow the government to fund part of its current account deficit by private capital flows from abroad.

CHALLENGES IN RUPEE INTERNATIONALIZATION:

• The biggest challenge to the internationalization of the rupee is whether or not other countries will actually accept the Indian currency.
• The rupee is not fully convertible and India’s share of global exports of goods is just about 2%.
• This reduces the necessity for other countries to hold rupees.
• The recent negotiation with Russia over a rupee settlement mechanism showed that Moscow was not willing to hold rupee deposits because of the trade gap between the two countries.

WHAT NEEDS TO BE DONE ?

• As the use of the rupee becomes significant, the bargaining power of Indian businesses would improve, adding weight to the Indian economy and enhancing India’s global stature and respect.
• The working group, headed by RBI Executive Director Radha Shyam Ratho suggested strengthening the financial market by fostering a global 24×5 rupee market and recalibration of the FPI (foreign portfolio investor) regime.
• Over the next two to five years, the group has recommended a review of taxes on masala bonds, international use of Real Time Gross Settlement (RTGS) for cross-border trade transactions and inclusion of Indian Government Bonds in global bond indices.

WAY FORWARD:

• Experts have recommended that efforts should be made for the inclusion of the rupee in IMF’s (International Monetary Fund) SDR (special drawing rights).
• The panel has suggested short- term measures like opening of INR accounts for non-residents in and outside India, and integrating Indian payment systems with other countries for cross-border transactions.

SOURCE: INDIAN EXPRESS