Internationalising the rupee without the ‘coin tossing’

Source:The Hindu

For Prelims: Gulf Rupee, Rupee Vostro, Convertibility, Renminbi (RMB), Dim Sum bonds, The Shanghai Free Trade Zone, Currency Swap Agreement, The Tarapore Committee, Fiscal deficit.

For Mains: Internationalisation of INR 

Highlights of the Article:

• The Indian government has announced a long-term road map for further internationalization of the rupee.
• The rupee's internationalization faces challenges due to low international demand and limited convertibility.
• The article suggests that India can learn from China's experience in internationalizing the Renminbi.
• Reforms such as making the rupee more freely convertible, developing a deeper rupee bond market, and encouraging invoicing in rupees are proposed to internationalize the rupee.
• The government's road map for rupee internationalization is expected to benefit Indian businesses, enhance liquidity, and improve financial stability while maintaining a balance between convertibility and exchange rate stability.

Context: 

The context of the article is the internationalization of the Indian rupee. It discusses the government's announcement of a long-term road map for further internationalization and highlights the current state of the rupee's international standing.

UPSC EXAM NOTES EDITORIAL ANALYSIS:

1. Introduction:

• The article focuses on the internationalization of the Indian rupee and the government's roadmap for its further development.
• It highlights the challenges faced by the rupee and compares India's situation with China's experience in internationalizing the Renminbi.

2. Current State of the Rupee:

• The rupee is not widely used internationally, with its share in the global foreign exchange market being only around 1.6%.
• India's share of global goods trade is 2%, indicating that the rupee's international presence is not proportionate to its trade volume.
• Efforts have been made to promote rupee internationalization, such as allowing external commercial borrowings in rupees and encouraging trade in rupees with certain countries.
• However, these measures have had limited impact, and India still predominantly buys oil from Russia in dollars.

3. Lessons from China's Experience:

• China's approach to internationalizing the Renminbi can provide valuable lessons.
• China gradually allowed the use of the Renminbi outside its borders for trade finance and select investment transactions.
• Currency swap agreements were signed with various countries, enabling the exchange of equivalent amounts in different currencies.
• China's efforts led to the internationalization of the Renminbi, with its share of international reserves reaching 2.88%.

4. Reforms for Rupee Internationalization:

• To enhance the international use of the rupee, several reforms can be pursued.
• The rupee should be made more freely convertible, allowing easier buying and selling by foreign investors.
• A deeper and more liquid rupee bond market should be developed to provide investment options in rupees.
• Encouraging Indian exporters and importers to invoice transactions in rupees would optimize trade settlement formalities.
• Currency swap agreements with more countries would facilitate settlement of trade and investment transactions in rupees.

5. Currency Management and Stability:

• Ensuring currency management stability is crucial for the internationalization of the rupee.
• Consistent and predictable issuance and retrieval of notes and coins are important factors.
• Exchange rate regime improvement is necessary to maintain confidence, as frequent demonetization or devaluation can negatively impact the rupee.

6. Recommendations from Tarapore Committees:

• The recommendations from the Tarapore Committees, including reducing fiscal deficits, controlling inflation, and addressing non-performing assets in the banking sector, should be pursued.
• These measures would contribute to overall financial stability and increase the attractiveness of the rupee as an international currency.

7. Balancing Convertibility and Exchange Rate Stability:

• The internationalization of the rupee requires a delicate balance between convertibility and exchange rate stability.
• India's policies should aim for predictable currency management while ensuring stability in the exchange rate.
• This balance is essential to attract foreign investors, facilitate trade, and promote the rupee's acceptance on the global stage.

8. Conclusion:

• The government's roadmap for rupee internationalization holds potential benefits for Indian businesses, liquidity, and financial stability.
• Reforms such as increased convertibility, a deeper bond market, and invoicing transactions in rupees are crucial.
• Currency management stability and implementing the Tarapore Committee's recommendations are important factors.
• Striking the right balance between convertibility and exchange rate stability is essential for the success of the rupee's internationalization efforts.