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Will the rupee emerge as a global currency?
Summary
An RBI-appointed panel has presented a roadmap to increase the use of the rupee for cross-border transactions. Members of the Asian Clearing Union are also looking to settle trade in local currencies to reduce dependence on the dollar. So what are the benefits for India?
What is currency internationalization?
Internationalization means using a currency for cross-border transactions, including for purchase of goods, services or financial assets by non-residents. An international currency can be used by private players to settle trade or by governments to intervene in currency markets and financing balance of payments. It can also be used as a reserve currency or as capital assets by private players. The process is closely interlinked with the size of an economy and the scale of trade. Currently, the US dollar, the Euro, the Japanese yen and the British pound are the leading reserve currencies in the world.
Will India benefit from a rupee move?
The use of the rupee in cross-border transactions helps the country’s exporters and importers to reduce transaction cost and limit exchange rate risks. It also helps lower the cost of capital due to better access to global financial markets and reduces the need to maintain foreign exchange reserves. Internationalization could allow the government to finance part of its budget deficit by issuing domestic currency debt in international markets rather than issuing foreign currency instruments. It could also allow the government to fund part of its current account deficit by private capital flows from abroad.
What’s the trend with the Indian currency?
RBI has put in place an additional arrangement for invoicing, payment and settlement of trade in rupees through Special Rupee Vostro Accounts (SRVAs). A total of 18 countries have been allowed to open SRVAs. The Asian Clearing Union has introduced rupee as a settlement currency. And Sri Lanka has formally named the rupee as a designated foreign currency.
Will the move face any challenges?
The biggest challenge to the internationalization of the rupee is whether or not other countries will actually accept the Indian currency. The rupee is not fully convertible and India’s share of global exports of goods is just about 2%. This reduces the necessity for other countries to hold rupees. The recent negotiation with Russia over a rupee settlement mechanism showed that Moscow was not willing to hold rupee deposits because of the trade gap between the two countries.
What are the panel’s recommendations?
The panel has suggested short-term measures like opening of INR accounts for non-residents in and outside India, and integrating Indian payment systems with other countries for cross-border transactions. As medium-term measures, the panel said there is a need to review taxes on masala bonds and international use of Real Time Gross Settlement for cross-border trade transactions. For the long term, the panel has recommended that efforts should be made for the inclusion of the rupee in IMF’s SDR basket.
