The Internationalisation of Rupee refers to the process of increasing the usage of the Indian rupee in cross-border transactions. It involves promoting the rupee for international trade, both for imports and exports, and gradually expanding its use in other types of transactions, such as capital account transactions.
This process is crucial for the nation’s economic progress and requires measures to open up currency settlement, strengthen swap and forex markets, and eventually achieve full convertibility of the rupee on the capital account.
Currently, major global reserve currencies include the US dollar, Euro, Japanese yen, and pound sterling. While efforts have been made by China to internationalize its currency, the renminbi, it has achieved limited success thus far.
Questions related to currency, foreign exchange, and international trade may feature in the Economy section of the Prelims. Understanding the concept of Internationalisation of Rupee is important for answering such questions accurately.
The Indian government’s recent announcement of a long-term roadmap for further Internationalisation of Rupee holds significant potential. While the Indian rupee was widely accepted in several Gulf countries in the 1950s, subsequent developments, such as the introduction of sovereign currencies and demonetization, have impacted confidence in the rupee. However, the Internationalisation of Rupee is crucial, and careful consideration must be given to address concerns expressed by India’s neighboring countries.
Currently, the rupee has limited international demand, with its daily average share in the global foreign exchange market hovering around 1.6%. This is in contrast to India’s share of global goods trade, which stands at approximately 2%.
Despite some measures taken to promote the Internationalisation of Rupee, such as enabling external commercial borrowings in rupees and facilitating trade in rupees with certain countries, transactions in the rupee remain limited. Additionally, India still predominantly purchases oil from Russia in dollars, and efforts to settle trade in rupees with Russia have faced challenges.
China’s Internationalisation of the Renminbi (RMB) offers valuable lessons. China adopted a phased approach, initially allowing the use of the RMB outside China for current account transactions and select investment transactions. Over time, China signed currency swap agreements with various countries and established offshore clearing banks and trading zones. These measures gradually internationalised the RMB and increased its share of international reserves.
To Internationalise of Rupee, several reforms can be pursued. Firstly, the rupee should be made more freely convertible, with the goal of full convertibility by 2060. This would enhance liquidity and attract foreign investors.
Additionally, a deeper and more liquid rupee bond market should be developed to provide investment options in rupees for foreign investors and trade partners. Encouraging Indian exporters and importers to invoice transactions in rupees would optimize trade settlement formalities.
Currency swap agreements, like the one with Sri Lanka, can enable trade and investment transactions in rupees without relying heavily on reserve currencies like the dollar.
Tax incentives for foreign businesses using the rupee in their Indian operations would also be beneficial. Currency management stability and a predictable exchange rate regime are essential, as excessive demonetization or devaluation could impact confidence. The rupee could also be promoted as an official currency in international organizations to enhance its profile.
Implementing the Tarapore Committee’s recommendations, including reducing fiscal deficits, controlling inflation, and addressing banking non-performing assets, would contribute to the rupee’s stability and acceptance on the global stage.
The government’s roadmap for the Internationalisation of Rupee offers numerous advantages, including facilitating Indian businesses’ global operations, enhancing liquidity, and improving financial stability. Careful currency management policies, predictable exchange rate regimes, and measures to address the concerns of neighboring countries are necessary for successful implementation. The Internationalisation of Rupee is a delicate balance between convertibility and exchange rate stability, and its realization can significantly benefit Indian citizens, enterprises, and the government’s financial objectives.
“Discuss the potential benefits and challenges of the Internationalisation of Rupee for India’s economy and its role in strengthening India’s global presence. Examine the strategies and reforms required to facilitate the Internationalisation process and analyze the impact on areas such as trade, investment, currency stability, and financial sector reforms.”
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The internationalization of the rupee refers to the process of increasing the usage of the Indian rupee in cross-border transactions, including international trade and capital account transactions.
The internationalization of the rupee is crucial for India's economic progress as it opens up opportunities for increased trade, investment, and collaboration. It reduces currency risk, decreases the need for large foreign exchange reserves, enhances bargaining power, and facilitates economic growth.
The internationalization of the rupee reduces currency risk for Indian businesses engaged in cross-border transactions, improves their bargaining power, and allows them to establish a stronger presence in international markets. It also attracts foreign investment, promotes exports, and contributes to overall economic growth.
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