BackIndia must gear up to curb volatility risks of international rupee: RBI Deputy Governor
Rao also said that internationalisation of rupee has its own benefits as well as challenges and risks which the country and the central bank will have to deal with
PremiumReserve Bank of India (RBI) Deputy Governor M Rajeshwar Rao said that India must prepare to manage the exchange rate volatility as the country progresses further towards internationalisation of the rupee.
Rao also said that internationalisation of rupee has its own benefits as well as challenges and risks which the country and the central bank will have to deal with.
An international currency is one that is freely available to non-residents, essentially to settle cross-border transactions, and in the case of the rupee, this will be achieved by promoting the currency for import and export, without any limits.
But, that will make the rupee more reactive to international events and that would increase outflows, increasing volatility.
"It is now widely accepted that while internationalisation and a freer capital account comes with its own set of benefits, it is not without risks," Rao said while delivering the keynote address at the 17th FEDAI conference at Cairo.
"Freer capital flows come with their own set of challenges, the primary one being that of volatility and we need to gear up to manage that."
He did not expand on how to manage the volatility in his comments. The central bank published a copy of the speech on its website on Thursday.
India has increasingly aimed to promote trade denominated in rupees. Last year in July, the RBI introduced a new mechanism to settle international trade in rupees, aiming to promote exports and facilitate imports.
Rao said there was a "good amount of interest" in the rupee trading arrangements the RBI was putting in place. And if the central bank's efforts towards rupee-invoicing bear fruit, local exporters and importers will not need to hedge, he added.
While Rao cautioned that increasingly interconnected markets will bring greater challenges, there were also opportunities.
New frontiers will also emerge as Indian banks expand their presence in offshore markets, non-residents participate more in domestic markets, and technological changes continue to transform the way markets function, he said.
In such an environment, Rao said, the RBI remains committed to continuously move ahead steadily and in line with the changing macro-financial environment globally and domestically.
He also said as the economy grows and becomes more developed, the scope of participation in foreign exchange markets would change.
"With the increasing integration of the economy with the rest of the world, more and more entities are likely to, directly or indirectly, get exposed to foreign exchange risks. There are likely to be demands for permitting hedging of economic exposures," Rao added.
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