Internationalisation of Indian Rupee

Internationalisation of Indian Rupee

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July 6, 2023

As the Government continues to work towards the goal of turning the rupee into an international currency, an IDG report by the RBI warns that internationalisation could lead to rupee volatility in the beginning.

There are three key features of Rupee internationalization and they are discussed here as follows:

• Acceptability - This implies that the Rupee is extensively used and accepted for financial transactions and trading in other countries and regions. The acceptance of the Rupee depends on several factors, including the size and strength of India’s economy, the liquidity and depth of domestic capital markets, monetary policy independence and credibility, and banking system resilience and strength.

• Convertibility - This means that rupees can be exchanged freely for different currencies. There are no limits or controls imposed by the government. The convertibility may be total or partial depending on the degree to which the capital account is liberalised.

• Attractiveness - This implies that other countries and institutions prefer the rupee over other currencies in terms of financial and trading operations. The attractiveness of the currency depends on many factors, including the variety and competitiveness of Indian export products, hedging instrument cost and availability, exchange rate volatility and inflation level, and the dispute settlement and enforcement framework.

Probable Implications for the Country:

• This exposes the Indian economy more to external shocks and fluctuations, as volatility in global market trends and sentiment can impact the demand and supply of rupees.

• Reducing the central bank’s flexibility and policy autonomy, as the central bank faces the challenge of financial stability, exchange rate, and balancing price in an increasingly open capital account environment.

• Increased accountability and transparency, as the government must implement good governance, sound fiscal practices, and structural adjustment to maintain trust and credibility with external actors.

Positive Implications - The benefits of internationalisation could include lower inflation, greater foreign exchange reserves, improved resource allocation, increased innovation and diversification, deeper and more fluid financial markets, stable exchange rates, and increased economic growth.

Negative Implications - The effects of internationalisation could include a deficit of fiscal policy flexibility, increased financial sector vulnerabilities, increased fiscal pressures, an increase in exchange rate instability, increased vulnerability to external shocks, increased social unrest and inequality, increased speculative capital inflows, etc.

Source - 1. The Indian Express 2. The Hindu Business Line