The Reserve Bank of India (RBI) appointed working group recently suggested the inclusion of the Indian rupee in the Special Drawing Rights (SDR) basket and recalibration of the foreign portfolio (FPI) investor regime, to expedite the internationalisation of the rupee. This concept essentially encompasses the increased utilisation of the local currency in cross-border transactions, thereby promoting the rupee in import and export trade and other monetary transactions.
The Historical Aspect
Prior to the 1960s, the Indian rupee was widely accepted as legal tender in countries such as the United Arab Emirates, Kuwait, Bahrain, Oman, and Qatar. However, the devaluation of the Indian currency led to the introduction of sovereign currencies in these countries to minimize dependence on the Indian rupee.
Potential Advantages of the Internationalisation Process
Internationalisation can lead to the appreciation of currency value by enhancing its demand in global trade, subsequently reducing transaction costs for businesses interacting with India. Further benefits include a more stable exchange rate due to increased global demand, alongside the bolstering of India’s geopolitical influence, strengthening economic ties, and improving diplomatic relations.
Existing Challenges
Despite the potential advantages, the rupee’s daily share in the global forex market remains negligible at around 1.6%. Furthermore, restrictions on full convertibility of the rupee for certain purposes have limited its use in international trade and finance. The demonetization exercise in 2016 and the recent withdrawal of the ₹2,000 note have undermined confidence in the rupee’s stability. Additionally, negotiations with countries like Russia to settle trades in rupees have been slow due to currency depreciation concerns and lack of awareness among traders.
Moving Towards Internationalisation
In recent years, attempts have been made to incorporate the rupee in trade settlements with 18 countries by allowing their banks to open Special Vostro Rupee Accounts (SVRAs). The RBI has also issued a circular on “International Trade Settlement in Indian Rupees” and allowed for external commercial borrowings in Rupees, such as Masala Bonds.
Strategies Enhancing Rupee Internationalisation
To accelerate internationalisation, setting up a liquid Bond Market and expansion of the Real-Time Gross Settlement (RTGS) system is pivotal. Full convertibility and encouraging Indian exporters and importers to invoice transactions in rupees can facilitate easier trade settlements. Currency swap agreements and consistent currency issuance will boost confidence in the rupee.
The Importance of Inclusion in the SDR Basket
The Indian rupee needs to be included in the Special Drawing Rights (SDR), an international reserve asset created by the International Monetary Fund (IMF) based on major global currencies. This will encourage foreign investments into Indian debt markets and support rupee internationalisation.
Insights from China’s Experience
China’s meticulously phased approach towards internationalising the Renminbi offers valuable insights. China initially enabled its currency for current account transactions and select investment transactions, before progressing towards making it a reserve currency. The establishment of offshore markets significantly facilitated this process.
About Foreign Portfolio Investment and SDR
Foreign Portfolio Investment comprises securities and financial assets held passively by foreign investors. It forms part of a country’s capital account and reflects in its balance of payments. Special Drawing Rights serve as the unit of account for the IMF, but are neither a currency nor a claim on the IMF. They include major currencies like US dollar, Euro, Yen, Pound Sterling, and Chinese Renminbi.
From Recommendations to Actions
Implementing the recommendations of the Tarapore Committee such as reducing fiscal deficits, inflation rates, non-performing assets should be the first step towards internationalising the rupee. Advocating for the rupee’s acceptance as an official currency in international organisations will further enhance its profile and acceptance.
