Internationalization of Rupee

Internationalization of Rupee

News: The Reserve Bank of India's inter-departmental group said that the Indian rupee has the potential to become an 'internationalized' currency.

Background:
• While we have already discussed about recommendations of the RBI’s IDG earlier. Today we will discuss about internationalization of rupee, its benefits and challenges in the Indian context.

What is Internalization of Rupee?
• Internationalization is a process that involves the use of a currency for more and more cross-border transactions such as trade, investment, remittances and tourism. For the rupee, it means that more and more international payments start taking place in the Indian currency.
• This involves promoting the rupee for current account transactions and foreign trade.

What are the benefits of Internalization of Rupee?
• It can reduce the currency risk for Indian enterprises that engage in international dealings, as they can avoid the fluctuations and uncertainties of exchange rates.
• It can also lower their transaction costs and increase their competitiveness in global markets.
• It can save foreign exchange reserves for India, as it can reduce the need for holding large amounts of foreign currencies to meet its external obligations.
• It enhances India’s economic sovereignty and reduce its vulnerability to external shocks.
• It can boost India’s trade and investment relations with other countries, especially in its neighbourhood and in Africa, where there is a demand for an alternative to the US dollar. It can also promote regional integration and cooperation among South Asian countries.
• It can enhance India’s soft power and influence in the world.
• It can also increase India’s role in global financial governance and institutions, such as the IMF and the World Bank.

What are the challenges to Internationalizing the Rupee?
• India’s small export footprint. If there is no demand for Indian goods, countries will not use the Rupee. For example, India’s share in Global exports is 2.4% while China (12.5%), USA (9.84%).
• Other challenge is Convertibility of Rupee. In some countries, currency is fully convertible. The dollar, Euro, Pound and Yen are fully convertible. While, Indian rupee is partially convertible which means there are exchange limits on how much you can convert.
• India has to liberalize its capital account and allow free movement of capital in and out of the country.
• Easier to convert currencies are increasingly vulnerable to shocks of Global economy. Thus, economists are suggesting India to be patient and build requisite reserves before fully convertibility of Indian rupee.
• India also has to maintain macroeconomic stability, fiscal discipline and low inflation to ensure confidence in the rupee.
• India has to develop its financial markets and infrastructure to support the global demand and supply of the rupee. This includes enhancing the liquidity, depth and diversity of the rupee market.

Way Forward
• Internationalization of Rupee will eventually happen as we further make economic strides and liberalize our capital markets. It will take its own time but in the short term we can work upon the suggestions given by RBI’s IDG, strengthen our domestic manufacturing and work upon integrating our financial markets with that of the world.
Source – Moneycontrol, Business Standard, Firstpost