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GLOBALISING THE RUPEE: A NEW ERA OF DOMINATION
India is the world’s fifth-largest economy when considering nominal GDP and the third largest in Purchasing Power Parity (PPP). As we all know, before the colonial period, India was known as the “Golden Bird” for its extensive wealth and trade across the borders. Now that the country has finally recovered and generated its lost revenue and resources after independence, it wishes to internationalise the Rupee and create a more prominent place for itself in world trade.
The internationalisation of the Rupee refers to the conversion of the Indian Rupee (INR) into a globally accepted currency for the economic processes of exchanging goods and services, trade, finance, and investment. It necessitates the use of the Indian Rupee for export and import trade and other current as well as capital account transactions.
The RBI and the Union Commerce Minister have announced a new economic policy for the financial year 2023 where the internationalisation of the Rupee would be given more importance and consideration.
In the early 1960s, the Indian Rupee was accepted as a legal tender by several countries including Qatar, Malaysia, Kuwait, Bahrain, and the United Arab Emirates. However, they reduced their reliance on the currency due to the devaluation in 1966. At present, the Indian Rupee is officially used by India, Bhutan, and Nepal. However, the currency is quite far from being internationalised.
The daily share of Indian goods in the global market is a bleak 2%, while that of the Rupee is only 1.6%. 86% of India’s imports are made in the US Dollar whereas only 5% of the imports are sourced from the USA. On the other hand, 86% of its exports are made in the US Dollar out of which only 15% are made to the said country. India is a far cry away from forming trade agreements in its currency and the shift has been painfully slow.
ROLE IN FOREIGN TRADE POLICY 2023
Piyush Goyal, Union commerce and industry minister announced the Foreign trade policy 2023, and special importance has been given to the internationalisation of the Rupee. The RBI’s Inter-Departmental Group (IDG) on July 5, 2023, announced various policies to increase internationalisation of the currency. This decision was made due to the settlement of foreign trade between India and other countries in INR on July 11, 2022, and in March 2023 with as many as 18 countries.
The constant weakening of the Indian Rupee regarding the US Dollar brought about the need for such a policy. The suggested measures include the inclusion of the Rupee in the SDR basket ( Special Drawing Rights) as well as adjusting the FPI (Foreign Portfolio Investor) regime in favour of the Rupee to exponentially accelerate the process.
BENEFITS OF INTERNATIONALISATION OF RUPEE
REDUCES DEPENDENCY ON FOREIGN CURRENCY
The use of INR reduces the dependency of the country on more widely used international currencies such as the US Dollar and the Euro. This can help overcome the issues that come with fluctuations in the prices and values of these currencies and eliminate the tedious process of conversion.
LOWERS TRADE COSTS
Internationalising the Rupee will help cut conversion costs and reduce the transactional costs during exports and imports or other trade with countries. It also reduces the costs incurred by companies on exchange rate risks.
Internationalising the Rupee would lead to smoother inflow and outflow of capital, making the country more attractive to foreign buyers and investors. It provides convenience and flexibility to the company and may increase the standing of the country in the global trade market.
INCREASE IN RECOGNITION
If the Rupee is a commonly used legal tender for international trade, it would increase the recognition and positively impact the image, honour as well as reputation of not only the Indian economy and currency but also the country as a whole. It would throw light on the stability and progress of the Indian economy after colonisation.
FOREIGN EXCHANGE RESERVE
The internationalisation of the Rupee would lead to savings and an increase in the level of foreign exchange reserves within the country. It would help increase global trade and FDI which will lead to inflow of cash into the country and generate trade surplus.
ISSUES IN IMPLEMENTATION
EXCHANGE RATE VOLATILITY
For the internationalisation of the Rupee, the stability of the currency is extremely important. Exchange rate volatility (changing rapidly) can discourage foreign investors and companies from using INR. The need to stabilise the currency poses a huge challenge to the government.
The demonetisation of the Indian Rupee in 2016 has led to decreased confidence in other countries in Indian currency and reduced positive public opinion. The recent withdrawal of the 2000 Rupee note has also caused a loss in confidence in the Indian economy and has made the Indian market and economic system seem unstable.
THE DOLLAR DOMINANCE
The Indian Rupee needs to overcome the challenges faced by the dominance of the US Dollar in the global trade market. There is a long way to go to increase the relevance and importance of the INR to compete with the widely used and recognized US Dollar.
TRADE SETTLEMENT ISSUES
While India has tried to settle trade with 18 countries in the Indian Rupee, converting Russian trade towards the INR has been a slow and daunting process. Russia is more confident using the US Dollar and has thus, limited the extent of growth.
The currency is not easily and fully convertible which decreases its popularity in the global market. Capital transactions and other purposes can not be fulfilled by the INR, due to restrictions in convertibility during these processes.
BOOSTING INTERNATIONALISATION OF RUPEE
LEARNING FROM CHINA
India should learn from China’s success in internationalising the Chinese currency of Renminbi (RNB) and its recognition in 2016. It can take advantage of the path laid out by China and avoid the mistakes made by the country.
Masala bonds are bonds made outside of India but in Indian currency. Taxes should be reduced and checked on these bonds to promote the inflow of INR capital. Reformers should also pay particular attention to creating a liquid bond market which will increase investment opportunities and convenience.
EXPANDING RTGS SYSTEM
The RTGS system (Real-time gross settlement) should be expanded to settle international monetary transactions. The RTGS system allows real-time transfer of funds and can support large transactions as well. It will help the global integration of the market and facilitate easy digital transactions.
LIBERALISE CURRENCY MARKET
The RBI has taken steps to liberalise the forex. It allows greater flexibility in the rate of exchange and reduces issues regarding quick transactions. Conversions of currencies are also facilitated by this method.
Currency swapping agreements have been made by India with many countries like Sri Lanka to facilitate trading and transactions to be made in INR. These allow the countries to be flexible and exchange currencies up to a certain limit.
Overall, the internationalisation of the Rupee is a step taken by the RBI towards domination of the Indian economy and currency in the Global market. It is an important and intelligent strategy to enhance the Indian role in global trade. While India has made significant progress over the years, time and effort will increase the importance of the currency exponentially and build confidence among foreign investors and companies. As the global economy evolves, the RBI formulates new policies and reforms to adapt and increase the relevance of the Indian Rupee in the global economic village.
Author: Jasleen Kaur Palne