Why in news? The Reserve Bank of India’s (RBI) inter-departmental group (IDG) acknowledged the potential of rupee becoming  an internationalised currency.

Highlights:

What does internationalisation of the rupee mean?

• Internationalisation is a process that involves increasing the use of the rupee in cross-border transactions.
• It involves promoting the rupee for import and export trade and then other current account transactions, followed by its use in capital account transactions between residents and non-resident in India.

Why do we need to internationalise Rupee?

• The US dollar dominates the foreign trade with around 88.3% turnover in the global foreign exchange market followed by Euro, Japanese Yen and Pound Sterling
• Indian still require regulatory approval for investing an amount above a pre-determined threshold level for the purpose of investments or purchasing assets overseas.
• In light of the economic sanctions imposed by the US on Russia for invading Ukraine and the growing clamour for finding an alternative to the US dollar for international transactions.

What is the present status ?

• India has allowed only full convertibility on the current account and partial capital account convertibility as of now.
• Banks from 18 countries are allowed to open Special Vostro Rupee Accounts (SVRAs) for settling payments in Indian Rupees.

What are the advantages of Internalization of rupee?

• Stable and Mature Markets: It will be free and open entry to an enormous number of global market participants with a huge unrestricted flow of capital.
• Increased Liquidity in Financial Markets: It helps further opening up of the currency settlement and a strong swap and forex market.
• Improved Employment and Business Opportunities: With increased participation from global players, new businesses, strategic partnerships, and direct investments flourish. It also helps in the creation of new employment opportunities across various industry sectors, as well as nurturing entrepreneurship for new businesses.
• Onshore Rupee Market Development: With internationalization of Indian rupee helps in evident development of offshore rupee markets in locations like Dubai, London, New York, and Singapore
• Easy Access to Foreign Capital: Local businesses can benefit from easy access to foreign loans at comparatively lower costs—lower interest rates. Indian companies currently have to take the ADR/GDR route to list on foreign exchanges. After full convertibility, they will be able to directly raise equity capital from overseas markets.
• Progress in Multiple Industry Sectors: Full convertibility will open the doors of many big international players to invest in these sectors, enabling much-needed reforms and bringing variety to the Indian masses.

What are the constraints ?

• Dollar dominance: There is a lack of reach of rupee trade and financial networks, the depth and liquidity as like US financial markets, and also a history of macroeconomic stability and currency convertibility
• High Volatility: Amid a lack of suitable regulatory control and rates subject to open markets with a large number of global market participants, high levels of volatility, devaluation, or inflation in forex rates may happen, challenging the country’s economy.
• Foreign Debt Burden: Businesses can easily raise foreign debt, but they are prone to the risk of high repayments if exchange rates become unfavourable.
• Effects on Balance of Trade and Exports: A rising, unregulated rupee makes Indian exports less competitive in the international markets. Export-oriented economies like India and China prefer to keep their exchange rates lower to retain the low-cost advantage. Once the regulations on exchange rates go away, India risks losing its competitiveness in the international market.
• Lack of Fundamentals: India’s basic challenges, a high dependence on exports, burgeoning population, corruption, socio-economic complexities, and challenges of bureaucracy may lead to economic setbacks post-full rupee convertibility.

Way forward

• Internationalisation of the rupee reduces the need for holding foreign exchange reserves and reducing dependence on foreign currency will make India less vulnerable to external shocks.
• As the use of the rupee becomes significant, the bargaining power of Indian businesses would improve, adding weight to the Indian economy and enhancing India’s global stature and respect.