Why internationalise the rupee?
India seeks to
establish the rupee as a global currency. The Reserve Bank of India’s (RBI)
inter-departmental group (IDG) stated on Wednesday that the rupee has the
potential to become an internationalized currency, citing India’s status
as one of the world’s fastest-growing economies and its incredible resilience
in the face of significant headwinds.
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In light of the US
economic sanctions imposed on Russia for invading Ukraine and the expanding
demand for a substitute for the US dollar for global transactions, such
suggestions are significant.
The adoption of the
rupee in international trade is growing as a result of this process known as
“internationalisation.”
It means promoting the
usage of the rupee in current account transactions (such as imports and
exports), then in capital account activities. All of these deals involve
exchanges between Indian citizens and foreign nationals. Further opening up of
the currency settlement and a robust swap and forex market are necessary for
the internationalisation of the currency, which is intrinsically related to the
development of the nation’s economy.
Importantly, this will
call for unrestricted international money transfers as well as full
adaptability of the currency on the capital account. So far, India has only
permitted complete adaptability on the current account.
At the moment, the
leading reserve currencies in the world are the US dollar, the Euro, the
Japanese yen, and the British pound. So far, China’s attempts to
internationalise the renminbi have been largely unsuccessful.
The term “Exorbitant Privilege,” used to
describe the current status of the US dollar, refers to the countless
advantages enjoyed by the United States as a result of the widespread adoption
of the US dollar as the international currency of choice.
The strength of the dollar may be traced back to a
number of reasons, including the size of the US economy, the breadth of its
trade and financial networks, the depth and liquidity of US financial markets,
and a long period of macroeconomic stability and currency convertibility. The
absence of competing currencies has also helped maintain the dollar’s dominant
position.
The RBI’s working committee has concluded that the
Chinese Renminbi poses the greatest threat to the US dollar. If the Chinese
economy and financial system can show the same long-term resilience, integrity,
transparency, openness, and stability as the US economy, then the yuan may be
able to compete with the US dollar in the future.
As a result of Western governments’ sanctions
against the Russian government, its public sector, and even people with ties to
the government, many nations are wary of incurring comparable punishment. There
has been growing criticism of the dollar’s role as the world’s reserve currency
from China, Russia, and a few other countries.
They’d prefer to use the Society for Worldwide
Interbank Financial Telecommunications (SWIFT) messaging system less frequently
and use other international payment systems for the US currency and its
financial markets.
In a more divided world, possessing large amounts of
foreign exchange reserves to deal with external shocks is no longer enough to
protect developing market economies from the danger of economic sanctions, as
was the case during the Asian crisis of 1997–1998.
A committee constituted by the Reserve Bank of India
has concluded that it is critical for the country to keep looking into
potential replacements for the US dollar and the Euro.
The
Benefits of Rupee Internationalisation
Indian companies can reduce their exposure to
foreign exchange risk by transacting in the rupee. Having a stable currency not
only helps businesses save money, but also helps them expand; giving Indian
companies a greater shot at success on a worldwide scale.
Reserves have a cost to the economy, but they assist
control exchange rate volatility and forecast external stability. Rupee
internationalisation lessens the demand for foreign-currency reserves. India’s
exposure to external shocks can be mitigated by lowering its need for foreign
currency.
India’s economy and international standing would
benefit from a greater role for the rupee as it becomes more widely used,
giving Indian enterprises more leverage in negotiations.
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