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Inter-Departmental Group of RBI has released the report & recommendations for Internationalisation of rupee.This demand can be driven by the use of the currency to settle international trade, to be held as a reserve currency or a safe-haven currency, or in general use as a medium of indirect exchange in other countries’ domestic economies via currency substitution.
What is an International Currency?
A currency can be termed “international” if it is widely accepted worldwide as a medium of exchange.Just like a domestic currency, an international currency performs the three functions of money – as a medium of exchange, a unit of account, and a store of value.
An international currency is used and held beyond the bor- ders of the issuing country for transactions between residents and non-residents, and between residents of two countries other than the issu- ing country. That is Currency ter-nationalization?
The US dollar has been the dominant global currency for the better part of the last century. Its position is supported by a range of factors, including the size of the US economy, the reach of its trade and financial networks, the depth and liquidity of US financial markets, and a history of macro Economic stability and currency convertibility.
Benefits of Currency Internationalization:
Limit Exchange Rate Risk: As the internationalisation of a country’s currency broadens and deepens its financial market, domestic firms may be able to invoice and settle their exports/imports in their currency, thus shifting exchange rate risk to their foreign counterparts.
Access to international financial markets: It permits domestic firms and financial institutions to access inter- national financial markets without assuming exchange rate risk.
New opportunities: It offers new profit opportunities to financial institutions, although this benefit may be offset in part by the entry of foreign financial institutions into the domestic financial market (to the extent that the government permits its internationalisation)
Boost capital formation: A larger, more efficient financial sector may serve the domestic non-financial sector better by reducing the cost of capital and widening the set of financial institutions that are willing and able to provide capital. This would boost capital formation in the economy thereby increasing Growth and reducing unemployment. This is the Other benifit of Internationalisation.
Finance Budget Deficit of Government: Currency internationalisation may, of course, allow a country’s government to finance part of its budget deficit by issuing domestic currency debt in in international markets rather te than issuing foreign currency instruments.
Foreign exchange reserves: The internationalisation of a currency reduces the requirement for the authorities to maintain and depend on large foreign exchange reserves in convertible currencies to manage external vulnerabilities.
Repay external sovereign debt: At the macroeconomic level, internationalisation of a currency results in lowering the impact of sudden stops and reversals of capital flows and enhances the ability to repay external sovereign debt.
Challenges in Internationalisation of Indian Rupee:
Conflict with domestic monetary policy: The obligation of a country to supply its currency to meet the global demand may come in conflict with its domestic monetary policies, popularly known as the Triffin dilemma.
Highlight external shocks: The internationalisation of a currency may accentuate an external shock, given the open channel of the flow of funds into and out of the country and from one currency to another.
Exchange rate volatility: The costs also emanate from the additional demand for money and also an increase in the volatility of the demand. With the advances in statistical reporting, most central banks can separate foreign demand for money, but with regard to some components, such as cash, uncertainty remains.
The main costs of allowing greater international use of the currency emerge from the possible increased volatility in the exchange and money markets, thus making the conduct of monetary policy more complex.
Can the Rupee become an International Currency?
During the last two decades, India has emerged as one of the world’s fastest growing economies and also a preferred destination for global investors. The Indian economy has also shown remarkable resilience against adverse global developments, especially during the COVID-19 pandemic.This leads to a thought of Internationalisation of Rupee.
On a Short Term Period:
There is some anecdotal evidence that INR is accepted to Some extent in Singapore, Malaysia, Indonesia, Hong Kong, Sri Lanka, United Arab (UAE), Kuwait, Oman, Qatar and the United Kingdom (UK), among others, while it is legal tender in Nepal and Bhutan.
Looking ahead, the conditions seem opportune for the emer- gence of INR as an international currency. It is argued that the bilateral currency swap arrangements may provide a blueprint for reducing the dependence on the US dollar for settling trade transactions
Designing a template and adopting a standardised approach for examining the proposals on bilateral and multilateral trade arrangements for invoicing, settlement and payment in INR and local currencies.Making efforts to enable INR as an additional settlement currency in existing multilateral mechanisms such as Asian Clearing Union (ACU).
Facilitating Local Currency Settlement (LCS) framework for bilateral transactions and operationalizing. Bilateral swap arrangements with the counterpart countries in local currencies. Encouraging opening of INR accounts for non-residents (other than nostro accounts of overseas banks) both in India and outside India.
Integrating Indian payment systems with other countries for cross-border transactions.Strengthening financial markets by fostering a global 24×5 INR market and promoting India as the hub for INR transactions and price discovery.Providing equitable incentives to exporters for INR trade settlement.
On a Long Term Period:
Over the long term, Indian society will achieve higher levels of trade linkages with other countries and improved macro-economic parameters, and INR may ascend to a level where it would be widely used and preferred by other economies as a “vehicle currency”. Thus, the IDG recommends that in the long run, efforts should be made for inclusion of INR in the IMF’s Special Drawing Rights (SDR) basket.
Overall, the benefits of internationalisation in terms of limited exchange rate risk, sib lower cost of capital due to better access to international financial markets, and reduced requirement of for- eign exchange reserves far outweigh the concerns.
Further, as the internationalisation of a currency is a long- drawn process involving continuous change and incremental progress, it would enable timely redressal of the associated concerns and challenges as we move forward.