Internationalisation of the rupee 

Internationalisation of the rupee 

Subject :Economy

Context:

RBI Deputy Governor T Rabi Sankar drew a distinction between the status of ‘rupee as an international currency’ and the process of ‘internationalisation’ of the rupee.

Background 

Steps taken towards internationalisation of the rupee.

• Enabling external commercial borrowings in rupees– Example Masala Bonds.
• Invoicing exports and imports in rupee
• Rupee settlement of external trade–Rupee Payment Mechanism through vastro account.
• Enabling domestic banks to operate in the offshore markets
• Primary Dealers (PDs) have been allowed to operate in forex markets to improve market liquidity.

Risks:

• External vulnerability–If a substantial portion of its trade is in rupee, non-residents would hold rupee balances in India which would be used to acquire Indian assets largely affected by external policies.
• Reduction in forex reserves –and the need for reserves would also reduce to the extent the trade deficit is funded in rupees.
• Complex monetary policy transmission – as rupee supply-demand can be affected by external policies and conditions. For instance, a global risk-off phase could lead non-residents to convert their rupee holdings and move out of India.

Concept:

Rupee as an international currency vs Internationalisation of the rupee:

• Internationalisation of the rupee is a process that involves increasing use of the rupee in cross-border transactions.
  • It  involves promoting 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 use of rupee for transactions between non-residents would increase confidence in “rupee as an international currency”-– a final stage of “rupee internationalisation”.
• Internationalization of Rupee will facilitate greater degree of integration of the Indian economy with the rest of the world in terms of foreign trade and international capital flows.
• Key benefits of internationalization of Rupee include savings on foreign exchange transactions for Indian residents, reduced foreign exchange exposure for Indian corporate, reduction in dependence on foreign exchange reserves for balance of payment stability
• One of the important drivers for internationalization of a currency is the countrys share in global merchandise and commercial services trade.