Internationalisation of Indian Rupee

 Internationalisation of Indian Rupee: Why Does it Matter and the Initiatives Taken for it

Fuelled by economic reforms, India's economic relations with other countries have undergone a remarkable transformation, in terms of trade and investments. Simultaneously, the global financial landscape has been evolving, moving away from a dominant USD. These changes, coupled with recent geopolitical shifts, lay the groundwork for the ascent of alternative currencies, especially the Indian Rupee (INR), onto the international stage.

What is Internationalisation of Currency? 

Currency internationalization is when a currency is used extensively beyond its home country's borders. This means it's not just used for transactions with the issuing country, but also for trade and other financial activities between other countries. 

Examples include the US dollar and the euro, which are used for international settlements and held as reserves by many countries. 

It's a complex journey with specific advantages and drawbacks. This process can benefit the issuing country by increasing its economic influence and reducing reliance on foreign currencies. However, it also comes with challenges like managing exchange rate fluctuations and potential loss of control over monetary policy.

Benefits of Internationalisation of Indian Rupee

The internationalization of the Indian Rupee can bring several benefits:

1. Reduced Transaction Costs: It can lower transaction costs for international trade and investments by reducing the need for currency conversions and associated fees.

2. Increased Global Trade: Internationalization can make it easier for Indian businesses to trade with international partners, as transactions can be conducted in rupees instead of having to rely on foreign currencies.

3. Enhanced Financial Market Development: It can lead to the development of more robust financial markets in India, including foreign exchange markets, which can attract foreign investment and improve liquidity.

4. Reduced Exchange Rate Risk: By promoting the use of the rupee in international transactions, businesses can reduce their exposure to exchange rate fluctuations, providing greater stability in financial planning and transactions.

5. Prestige and Recognition: Internationalization of the rupee can enhance India's standing in the global financial system and increase its role in international finance, potentially leading to greater influence in global economic decision-making.

6. Diversification of Reserves: For other countries, holding rupees as part of their foreign exchange reserves can provide diversification benefits, potentially enhancing stability in times of global economic uncertainty.

Overall, internationalization of the Indian Rupee can contribute to economic growth, stability, and integration with the global economy.

Disadvantages of Internationalisation of Indian Rupee

While there are potential benefits to the internationalization of the Indian Rupee, there are also some potential disadvantages:

1. Exchange Rate Volatility: Internationalization could expose the rupee to greater volatility in the foreign exchange markets, which could affect the purchasing power of individuals and the competitiveness of Indian exports.

2. Loss of Monetary Control: Greater use of the rupee in international transactions could make it more difficult for the Reserve Bank of India (RBI) to implement monetary policy and control inflation, as the central bank's actions may have unintended consequences on the exchange rate.

3. Dependence on External Factors: The value of the rupee in international markets could become more dependent on external factors, such as global economic conditions and investor sentiment, potentially reducing India's control over its currency.

4. Currency Speculation: Internationalization could increase speculative trading in the rupee, leading to greater volatility and potentially destabilizing effects on the economy.

5. Risk of Currency Crisis: If the rupee becomes heavily used in international transactions but experiences a sudden loss of confidence from investors or a balance of payments crisis, it could lead to a sharp depreciation of the currency and economic instability.

6. Competitiveness Challenges: A stronger or more volatile rupee could make Indian exports less competitive in international markets, potentially harming certain sectors of the economy.

Initiatives Taken By India

1) RBI enabled external commercial borrowings in Rupees (especially Masala Bonds).

2) Banks from these countries have been allowed to open Special Vostro Rupee Accounts (SVRAs) for settling payments in Indian Rupees.

3) Bilateral Swap Arrangements (BSA): India currently has a BSA with Japan as a line of support in case of any balance of payments issue. Under the South Asian Association for Regional Cooperation (SAARC) swap agreement, the requesting central bank can make withdrawals in dollar, Euro and also in rupee. 

5) RBI making efforts to increase the global outreach of the UPI system to facilitate cross-border transactions. Various other initiatives have also been undertaken to facilitate cross-border payments, especially personal remittances like the Money Transfer Service Scheme (MTSS).  

Conclusion

India's external sector has shown remarkable progress in the last three decades after the economic liberalisation reforms were set in motion. The significant surge in foreign exchange reserves, FDI, imports, and exports over the last decade reflects this transformation. As India continues to build on its economic strengths and navigate these changes, the prospect of the INR gaining greater international recognition and utility becomes increasingly plausible.