RBI inter-departmental group plan to internationalise Rupee

  • July 6, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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RBI inter-departmental group plan to internationalise Rupee

Subject: Economy

Section: External Sector 

Key Points:

  • An inter-departmental group (IDG) of the RBI was set up to study and recommend strategy towards achieving internationalisation of the rupee. Over the long term, if these measures are taken, the INR may ascend to a level where it would be widely used and preferred by other economies as a “vehicle currency”.
  • Why India should aim for internationalisation ?
    • INR has the potential to become an internationalised currency as India is one of the fastest growing countries
    • It has shown remarkable resilience even in the face of major headwinds.
  • What will be the benefit of greater internationalisation ?
    • Internationalisation of INR can lower transaction costs of cross-border trade and investment operations by mitigating exchange rate risk.
  • The IDG has recommended several measures to help achieve this goal:
    • Having a Local Currency Settlement (LCS) framework for bilateral transactions in local currencies, and bilateral and multilateral trade arrangements for invoicing, settlement and payment in INR and local currencies
    • Allowing banking services in INR outside India through off-shore branches of Indian banks
    • Encouraging opening of INR accounts for non-residents, both within and outside India, these should be other than nostro accounts of overseas banks. Harmonising of the present Know Your Customer (KYC) guidelines will be necessary for this.
    • FPI (foreign portfolio investment) regime will have to be over-hauled.
    • Progressive capital account convertibility, wherein the domestic currency increasingly acquires the character of a de facto freely convertible currency for international financial transactions.
    • Making efforts to enable INR as an additional settlement currency in existing multilateral mechanisms. Indian payment systems should also be integrated with other countries for cross-border transactions.
    • Launch of BIS Investment Pools (BISIP) in INR and inclusion of government securities in global bond indices.
    • Review of taxes on masala bonds, examination of taxation issues in financial markets to harmonise tax regimes of India and other financial centres
Concepts and Terms

Vehicle Currency: Currency that is used as a unit of account, medium of exchange and store of value not only for transactions within the country, but also for international public and private transactions.

Bank for International Settlements (BIS) The BIS provides central banks and financial supervisory authorities with a forum for dialogue and cooperation, where they can freely exchange information, forge a common understanding and decide on common actions.

BIS Reserve Pooling Arrangement BIS works with major reserve currency-issuing central banks to assist in the implementation of part of the liquidity support packages provided by these central banks to their counterparts to protect against market stresses and to safeguard financial stability. The reserve pooling provides an additional pool to the participating central banks to draw in event of need over and above their contributions. BIS in 2022 announced a Renminbi Liquidity Arrangement for select Central Banks (China, Indonesia, Malaysia, Hong Kong, Singapore and Chile).

Local Currency Settlement (LCS) framework The framework aims to encourage the use of local currencies for settlement of trade and investment among the three countries hence reducing dependence on international reserve currencies like Dollar.

Masala bonds Masala bonds are bonds issued outside India but denominated in Indian Rupees, rather than the local currency. Masala is a Hindi word meaning spices. The term was used by the International Finance Corporation (IFC) to evoke the culture and cuisine of India.

Nostro Account A nostro account refers to an account that a bank (say Russia) holds in a foreign currency (INR) at another bank (say SBI). Now that same account is “Nostro” (meaning ‘our’) for Russia and “Vostro”(meaning ‘your’) for India.

economy RBI inter-departmental group plan to internationalise Rupee