Internationalisation of Rupee

Introduction

India's ambition to internationalize the Indian Rupee (INR) aims to enhance its role in global trade and cross-border transactions. This process involves increasing the use of INR for international payments, much like the US Dollar, Euro, and other leading reserve currencies. However, the Chinese Yuan (Renminbi) poses a significant challenge to these efforts due to its growing prominence in global trade.

1. Meaning of Internationalisation of Rupee:

• Internationalisation of the rupee refers to its increased use in global trade and cross-border payments, rather than just domestic transactions.
• It involves using INR to settle international transactions, thereby reducing dependence on foreign currencies like the US Dollar.

2. Requirements for Internationalisation of Rupee:

• Use for Trade Invoicing: As per the Economic Survey 2023, the increasing use of INR for trade invoicing is essential for it to be recognized as an international currency. Currently, INR accounts for 1.6% of global forex turnover, compared to the US Dollar’s 88%.
• Opening Up: There needs to be an opening up of currency settlement systems and a robust currency swap and forex market. This includes promoting INR for current account transactions and foreign trade.
• Full Convertibility: The rupee needs to be fully convertible in the capital account to facilitate unrestricted cross-border fund transfers. Currently, INR is fully convertible in the current account but partially in the capital account.

3. Benefits of Internationalisation of Rupee:

• Protection Against Currency Volatility: Using INR in international trade can protect Indian businesses from currency risk.
• Strengthening INR: Increased global transactions in INR will boost its demand, potentially appreciating its value and reducing currency conversion costs.
• Maintaining Forex Reserves: It will reduce India's need to hold large foreign currency reserves, making the economy more resilient to external shocks.
• Bargaining Power: Greater use of INR in international transactions will enhance India’s bargaining power in global markets.

4. Progress in Internationalisation of Rupee:

• Trade Settlement for ACU Countries: RBI’s facilitation of rupee settlement for all Asian Currency Union countries promotes INR in regional trade.
• Rupee Vostro Accounts: RBI has allowed 20 banks to open 92 Special Rupee Vostro Accounts with partner banks from 22 countries to promote bilateral trade in INR.
• Bilateral Trade Settlements: India has made significant strides by settling trades with the UAE in INR, including payments for crude oil and gold.

5. Challenges in Internationalisation of Rupee:

• Payment Settlement with Russia: A significant trade gap with Russia and the fear of rupee accumulation without reciprocal trade poses challenges. Additionally, Western sanctions deter Indian banks from facilitating trade with Russia.
• Currency Volatility: The volatility of INR and the ruble complicates domestic currency trade.
• Global Trade Share: India’s small share in global exports (about 2%) limits the necessity for other countries to hold INR.
• The Yuan Challenge: The Chinese Yuan’s growing prominence, especially in trade with Russia, poses a direct challenge to INR internationalisation efforts.

6. Measures in Pipeline to Boost Internationalisation:

• Liberalization of Regulations: Reviewing Foreign Exchange Management Regulations to allow non-residents to open rupee accounts outside India and facilitate rupee lending.
• SFMS Extension: Extending the Structured Financial Messaging System globally to reduce dependence on major trading currencies.
• GIFT City Push: Encouraging trading of foreign currency-INR pairs at the Gujarat International Finance Tec-City (GIFT City) to promote INR’s international use.
• Review of Regulations: Ongoing reviews of IFSC regulations, FEMA rules, and inward remittance schemes to streamline international financial operations.

Conclusion

The internationalisation of the Indian Rupee represents a strategic move towards enhancing India’s economic resilience and global financial standing. While challenges such as trade imbalances, currency volatility, and competition from the Chinese Yuan persist, comprehensive measures and reforms can propel INR towards greater acceptance in global trade. This endeavour not only aims to bolster the rupee’s value but also to fortify India’s position in the international economic arena.

MCQs on Internationalisation of Rupee

1. What does the internationalisation of the Indian Rupee primarily involve?

a) Using INR to make payments and buy things in a foreign country

b) Increasing the use of INR for domestic transactions

c) Using INR for international trade and cross-border payments

d) Converting INR to other currencies for international transactions

Answer: c) Using INR for international trade and cross-border payments

2. Which of the following is a leading reserve currency in the world?

a) Indian Rupee

b) Chinese Yuan

c) Brazilian Real

d) Japanese Yen

Answer: d) Japanese Yen

3. As per the Economic Survey 2023, what is a prerequisite for INR to be considered an international currency?

a) Full convertibility in the capital account

b) Increased use for trade invoicing

c) Opening up of currency settlement systems

d) Establishing more Rupee Vostro Accounts

Answer: b) Increased use for trade invoicing

4. What is a significant challenge in internationalising the Indian Rupee in trade with Russia?

a) Lack of rupee convertibility

b) High trade gap in favor of Russia and fear of rupee accumulation

c) Absence of trade agreements

d) Volatility of the US Dollar

Answer: b) High trade gap in favor of Russia and fear of rupee accumulation

5. Which measure aims to reduce India's dependence on other major trading currencies for cross-border payment messaging?

a) Full convertibility of INR

b) Opening more Rupee Vostro Accounts

c) Extending the Structured Financial Messaging System (SFMS) globally

d) Liberalizing Foreign Exchange Management Regulations

Answer: c) Extending the Structured Financial Messaging System (SFMS) globally

Mains Question and Answer

Question:

Discuss the concept of internationalisation of the Indian Rupee and its significance. What are the requirements for this process, and what progress has India made towards it? Identify the challenges faced and suggest measures to overcome them, considering the competitive landscape with the Chinese Yuan.

Answer:

Introduction: Internationalisation of the Indian Rupee (INR) refers to the process of increasing its use for international trade and cross-border transactions. This involves enabling the INR to be used similarly to leading reserve currencies like the US Dollar, Euro, Japanese Yen, and Pound Sterling. This move aims to reduce dependency on foreign currencies, enhance economic resilience, and strengthen India’s global financial standing.

Body:

1. Significance of Internationalisation of the Rupee:

• Currency Volatility Protection: Reducing dependency on foreign currencies can protect Indian businesses from currency risks and volatility.
• Strengthening INR: Increased global demand for INR can appreciate its value, reduce currency conversion costs, and lower transaction expenses.
• Forex Reserves Management: Reducing the need for large foreign currency reserves can insulate the Indian economy from external shocks.
• Bargaining Power: Greater use of INR in international transactions enhances India’s influence and bargaining power in global markets.

2. Requirements for Internationalisation of Rupee:

• Trade Invoicing: As per the Economic Survey 2023, increasing the use of INR for trade invoicing is essential for its recognition as an international currency. The INR needs to match or exceed the global forex turnover of non-US, non-Euro currencies (currently at 4%).
• Opening Up: A robust currency settlement system and a strong forex market promoting INR for current account transactions and foreign trade are necessary.
• Full Convertibility: INR must achieve full convertibility in the capital account, allowing unrestricted cross-border fund transfers. Currently, INR is fully convertible in the current account but only partially in the capital account.

3. Progress in Internationalisation of Rupee:

• Trade Settlement for ACU Countries: The Reserve Bank of India (RBI) facilitates rupee settlement for all Asian Currency Union (ACU) countries, enhancing regional trade in INR.
• Rupee Vostro Accounts: RBI has allowed 20 banks to open 92 Special Rupee Vostro Accounts with partner banks from 22 countries, promoting bilateral trade in INR.
• Bilateral Trade Settlements: India has begun settling trades with countries like the UAE in INR, including payments for crude oil and gold.

4. Challenges in Internationalisation of Rupee:

• Payment Settlement with Russia: A significant trade imbalance with Russia and the fear of rupee accumulation without reciprocal trade create challenges. Moreover, Western sanctions deter Indian banks from facilitating trade with Russia.
• Currency Volatility: INR and the ruble have experienced considerable volatility, complicating trade in domestic currencies.
• Global Trade Share: India’s share in global exports is about 2%, reducing the necessity for other countries to hold INR.
• The Yuan Challenge: The Chinese Yuan’s growing prominence, particularly in trade with Russia, poses a direct challenge. For instance, 95% of trade between Russia and China is conducted in their domestic currencies.

5. Measures to Boost Internationalisation Efforts:

• Liberalizing Regulations: Review Foreign Exchange Management Regulations to allow non-residents to open rupee accounts outside India and facilitate rupee lending by Indian banks.
• Extending SFMS: Implementing the Structured Financial Messaging System (SFMS) globally for cross-border payment messaging can reduce dependence on major trading currencies.
• GIFT City Initiatives: Encourage trading of foreign currency-INR pairs at Gujarat International Finance Tec-City (GIFT City) to promote INR’s international use.
• Review of IFSC Regulations: Ongoing reviews of International Financial Services Centre (IFSC) regulations, FEMA rules, and inward remittance schemes can streamline international financial operations.

Conclusion:

 Internationalisation of the Indian Rupee is a strategic move to enhance India’s economic resilience and global financial standing. While challenges such as trade imbalances, currency volatility, and competition from the Chinese Yuan persist, comprehensive measures and reforms can propel INR towards greater acceptance in global trade. This endeavour aims not only to bolster the rupee’s value but also to fortify India’s position in the international economic arena, ensuring a more robust and stable economy.