INTERNATIONALISATION OF RUPEE

1. Context

India aims to position the rupee as a global currency, recognizing its potential in international trade and finance. The Reserve Bank of India's inter-departmental group (IDG) proposes a roadmap towards rupee internationalisation, driven by India's economic growth and the need for alternatives to the US dollar amidst geopolitical tensions.

2. Understanding Internationalisation

• Internationalisation entails increasing the use of the rupee in cross-border transactions, beginning with import-export trade, followed by current account transactions, and ultimately capital account transactions.
• Achieving currency internationalisation requires an open currency settlement system, a robust swap and forex market, and the eventual full convertibility of the rupee on the capital account.

3. The Relevance and Challenges

• The US dollar's dominance as a global reserve currency grants it significant advantages, known as the "Exorbitant Privilege."
• To challenge this dominance, China's renminbi has emerged as a potential competitor.
• However, the renminbi's success will depend on policies, resilience, integrity, transparency, and stability demonstrated by both the US and Chinese economies.

4. Addressing Concerns

• In light of recent sanctions imposed on Russia and the growing desire for alternatives to the US dollar, countries like China and Russia have raised concerns over their dependence on the dollar and the SWIFT messaging system.
• India, too, seeks alternatives to mitigate potential risks and reduce reliance on dominant currencies.

5. Advantages of Rupee Internationalisation

• International use of the rupee mitigates currency risk for Indian businesses, reducing costs and promoting growth.
• By reducing the need for foreign exchange reserves, India becomes less vulnerable to external shocks.
• The rupee's prominence enhances the bargaining power of Indian businesses, elevating India's global stature and respect.

6. Recommended Measures

Short-term measures include adopting a standardised approach for trade invoicing and settlement in rupees, encouraging rupee accounts for non-residents, and integrating payment systems for cross-border transactions. Strengthening the financial market, recalibrating the foreign portfolio investor regime, and establishing a 24x5 global rupee market are also proposed.

Medium-term measures span two to five years and involve reviewing taxes on masala bonds, exploring international use of Real-Time Gross Settlement (RTGS) for trade transactions, and considering the inclusion of Indian Government Bonds in global bond indices.

Long-term measures entail efforts to include the rupee in the International Monetary Fund's Special Drawing Rights (SDR), an international reserve asset based on a basket of major currencies.

7. The Way Forward

• The internationalisation of the rupee is a strategic objective for India, offering benefits such as reduced currency risk, enhanced global presence, and increased economic stability.
• Through a systematic roadmap encompassing short, medium, and long-term measures, India aims to establish the rupee as a globally recognised currency, providing an alternative to existing dominant currencies.