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Internationalising the Rupee
Context:
The Reserve Bank of India (RBI) allowed the opening of rupee accounts in other countries to boost the use of Indian currency globally.
More on News:
- To internationalize the domestic currency, the RBI has unveiled a strategic action plan for 2024-25.
- Persons Resident Outside India (PROIs) will be able to open rupee (INR) accounts outside India.
internationalization of the Indian Currency
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- It refers to the process of increasing the use of the Rupee in international transactions, including trade settlements and foreign investments.
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Case for INR as an Alternative Reserve Currency:
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- India, as the fastest-growing major developing economy, aims to become the third-largest economy soon.
- Incremental steps by the government and RBI towards global acceptance of INR.
- RBI established a rupee trade settlement with 18 countries.
- Banks from these nations can open Special Vostro Rupee Accounts (SVRAs) for payment settlements.
- Discussions were ongoing for RBI to make INR acceptable in Thailand, a popular overseas holiday destination for Indians.
- India signed a pact with UAE to pay oil bills in INR.
- India signed INR oil payment pacts with UAE and trades are executed for Russian oil imports as well.
- India is exploring similar arrangements with other 39 countries supplying crude oil.
- Increased purchasing power for Indians and better returns for global investors, fostering economic well-being.
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Advantages:
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- Reduced reliance on foreign currencies will help minimise currency risks for Indian businesses.
- Decreased currency risks will lower the cost of conducting international transactions.
- Thus, facilitating growth and global expansion for Indian businesses.
- Decrease in import costs, narrowing current account deficit, and strengthening country’s balance sheet.
- As rupee gains globally, India’s reliance on holding significant foreign currency reserves could diminish.
- This can potentially lead to more efficient allocation of resources.
- Internationalisation of rupee will help reduce exchange rate volatility.
- As increased global demand stabilises its value and enhances predictability for international transactions.
- Global acceptance of the Rupee can help enhance India’s economic and geopolitical standing.
- Reduced pressure on RBI to maintain high USD reserves.
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Challenges:
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- Initial volatility in exchange rates may arise from opening the currency to international markets.
- The INR is not fully convertible resulting in restrictions on capital transactions, limiting its use in international trade and finance.
- A stronger demand for the Rupee worldwide could drive up its value compared to other currencies.
- This can make Indian exports more expensive and potentially reduce their competitiveness in global markets.
- The Triffin dilemma poses a challenge for India in balancing domestic economic stability while meeting global demand for Rupee.
- This balancing act is crucial for internationalising the Rupee without jeopardising India’s economic stability.
- 2016 demonetization and recent withdrawal of Rs 2,000 note have eroded trust in rupee, especially among neighbours like Bhutan and Nepal.
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Recommendations:
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- Standardise approaches for bilateral and multilateral trade transactions, encouraging the use of the Rupee and local currencies.
- Facilitate the opening of Rupee accounts for non-residents in India and abroad.
- Promote the use of Real-Time Gross Settlement (RTGS) for cross-border trade.
- Include Indian Government Bonds in global bond indices.
- Pursue inclusion of the Rupee in the IMF’s Special Drawing Rights (SDR) basket.
RBI’s Strategic Action Plan: 2024-25
- The plan emphasises the continuous synchronisation of the Foreign Exchange Management Act (FEMA) Operating Framework with the evolving macroeconomic environment.
- Rationalisation of Guidelines with a particular emphasis on liberalising the external commercial borrowing (ECB) framework.
- Phase I of the Software Platform for ECBs and Trade Credits Reporting and Approval (SPECTRA) project will be implemented, enhancing efficiency in these processes.
- Indian banks will be allowed to lend INR to PROIs, facilitating foreign direct investment (FDI) and portfolio investment through special accounts like Special Nonresident Rupee (SNRR) and Special Rupee Vostro Account (SRVA).
- The Liberalised Remittance Scheme (LRS) will be rationalised, and regulations under the International Financial Services Centre (IFSC) will be reviewed to align with the internationalisation agenda.
- Regulations will be streamlined to enable bilateral trade settlement in local currencies, promoting the internationalisation of the INR.
- Liquidity operations will align with the monetary policy stance, while foreign exchange operations will aim to ensure orderly movements in the rupee exchange rate.
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Liberalised Remittance Scheme (LRS):
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