The government’s announcement of a long-term roadmap for rupee internationalization can prove to be a positive exercise. In the 1950s, the Indian rupee was the legal tender for almost all transactions in the United Arab Emirates (UAE), Kuwait, Bahrain, Oman and Qatar, with the Gulf monarchies buying rupees with pounds sterling. In 1959, to reduce the challenges associated with gold smuggling, the Reserve Bank of India (Amendment) Act was enacted, which enabled the creation of the “Gulf Rupee”, in which notes were issued by the central bank for circulation only in the West Asian region They went. Indian currency holders were given six weeks to convert their Indian currency, so that the transition could go through smoothly. However, by 1966, India devalued its currency, eventually leading some West Asian countries to replace the Gulf Rupee with their own currency. Confidence in the stability of the Indian rupee, coupled with the oil-revenue-linked boom, gradually led to the introduction of sovereign currencies in the region. The move to withdraw the ₹2,000 note in 2023 has also affected the confidence in the rupee.
The demonetisation of 2016 also shook confidence in the Indian rupee, especially in Bhutan and Nepal. Both countries continue to fear additional policy changes (including further demonetisation) by the RBI. Internationalization of the rupee cannot begin without taking into account the concerns expressed by India’s neighbours.
very low international demand
The rupee is far from internationalized – the daily average share of the rupee in the global foreign exchange market is around ~1.6%, while India’s share of global goods trade is ~2%. India has taken some steps to promote the internationalization of the rupee (for example, enabling external commercial borrowing in rupees), including allowing Indian banks to open rupee vostro accounts for banks in Russia, the United Arab Emirates, Sri Lanka and Mauritius. And the emphasis is on ways to do business. Established with ~18 countries in Rs. Although such transactions are limited, India still buys oil from Russia in dollars. Ongoing talks with Russia to settle trade in rupee are going slow, with Russia expected to have an annual rupee surplus of over $40 billion – reports indicate Russian banks are bracing for further depreciation of the currency. Are against this trade considering the risk involved. Lack of awareness among traders about local currency facilities. In short, there is very little international demand for trading in the Indian Rupee.
For a currency to be considered a reserve currency, the rupee must be fully convertible, easily usable and available in sufficient quantity. India does not allow full capital account convertibility (i.e., allowing free movement of local financial investment assets into foreign assets and vice versa), placing significant constraints on the exchange of its currency with others – past fears of capital flight Capital outflows from India induced by foreign exchange (i.e., monetary policies/lack of growth) and exchange rate volatility given the significant current and capital account deficits.
china experience
There are lessons to be learned from China’s example in the internationalization of the renminbi. As noted in an online article, prior to 2004, the RMB could not be used outside China. By 2007, the “dim sum” bond and offshore RMBD bond market had been created, with financial institutions in Hong Kong allowed to issue dim sum bonds until 2009. After 2008, China adopted a phased approach, enabling the use of RMB for trade. finance (i.e., financial instruments to facilitate international trade and commerce), investment and, in the longer term, as a reserve currency.
First, it allowed the use of RMB outside China for current account transactions (eg, commercial trade, interest payments, dividend payments) and select investment transactions (eg, foreign direct investment, outbound direct investment). By 2009, China had signed currency swap agreements (i.e., the exchange of equal amounts, but in different currencies) with countries such as Brazil, the United Kingdom, Uzbekistan, and Thailand. Soon, it allowed central banks, offshore clearing banks and offshore participating banks to invest additional RMB in debt securities. The Shanghai Free Trade Zone was launched in September 2013, to allow free trade between non-resident onshore and offshore accounts.
Over time, as the RMB became internationalized, reserve currency status was increasingly enabled (for example, by the second quarter of 2022, the RMB’s share of international reserves had reached ~2.88%), as noted in the article Has gone.
forward these improvements
Several reforms can be done to internationalize the rupee. It should be made more freely convertible, with a target of full convertibility by 2060 – allowing financial investments to move freely between India and abroad. This will allow foreign investors to buy and sell the rupee easily, thereby increasing its liquidity and making it more attractive. Additionally, the RBI should push for a deeper and more liquid rupee bond market, giving foreign investors and Indian trading partners more investment options in the rupee, thereby enabling its international use. Indian exporters and importers should be encouraged to bill their transactions in rupees – Customizing trade settlement formalities for rupee import/export transactions would go a long way. Additional currency swap agreements (as with Sri Lanka) would allow India to settle trade and investment transactions in rupees, without resorting to a reserve currency such as the dollar.
Additionally, tax incentives for foreign businesses to use the rupee in operations in India would also help. The RBI and the finance ministry should ensure currency management stability (continuous and predictable issue/receipt of notes and coins) and reform the exchange rate regime. More demonetisation (or devaluation) will hit confidence. International organizations may initiate a push to make the rupee the official currency, giving it a higher profile and acceptability. The recommendations of the Tarapore Committees (in 1997 and 2006) should be taken forward, which emphasized on reducing the fiscal deficit to below 3.5%, reducing the headline inflation rate to 3%-5% and reducing gross banking non-performing assets should go. less than 5%.
The government’s road map for further internationalization of the rupee will make it easier for Indian businesses to trade/invest abroad and enhance the liquidity of the rupee, enhancing financial stability. It should also benefit Indian citizens, enterprises and the government’s ability to finance the deficit. Balancing rupee convertibility against exchange rate stability is a delicate balance. It is expected that predictable currency management policies will be put in place.
Firoz Varun Gandhi is a third term Member of Parliament (BJP), representing the Pilibhit parliamentary constituency of Uttar Pradesh