Context:
Recently, the Reserve Bank of India (RBI) has outlined several aspirational goals in preparation for India’s fast-growing economy, aiming to be “future-ready” by the time it reaches its centenary year, RBI@100.
Relevance:
GS III: Indian Economy
Dimensions of the Article:
- What are the Aspirational Goals of RBI?
- What are the Challenges in Achieving the Aspirational Goals of RBI?
- Steps to Reach the Aspirational Goals of RBI
What are the Aspirational Goals of RBI?
Capital Account Convertibility:
- Aim to achieve full capital account convertibility, allowing unrestricted conversion between the rupee and foreign currencies for capital transactions.
Non-Resident Transactions:
- Facilitate non-residents in using the rupee for cross-border transactions, improving rupee account accessibility for those outside India.
- Approach interest-bearing deposits for non-residents cautiously.
- Support Indian multinational corporations in making overseas investments.
Digital Payment Systems:
- Extend the use of India’s digital payment systems (UPI, RTGS, NEFT) both domestically and globally, and link them with other countries’ systems.
- Begin by integrating Indian payment systems with international ones.
- Implement the Central Bank Digital Currency (e-Rupee) gradually.
Banking Sector Alignment:
- Align the growth of the banking sector with national economic development.
- Strive to position 3-5 Indian banks among the top 100 global banks in terms of size and operations, establishing the Reserve Bank as a leading central bank for the global south.
- Assist the International Financial Services Centres Authority (IFSCA) in making GIFT City a premier international financial hub.
Monetary Policy and Economic Stability:
- Balance price stability with economic growth from the perspective of an Emerging Market Economy.
- Improve monetary policy communication and address debt overhang issues in key economies.
- Provide guidance for stress testing asset portfolios, enhance payment systems against climate risks, and propose disclosure norms and a government taxonomy for climate risks.
Trade and Investment Standardization:
- Standardize bilateral and multilateral trade invoicing, settlement, and payment in rupee and local currencies.
- Foster a global rupee market and recalibrate the foreign portfolio investor regime.
- Review taxes on rupee masala bonds.
- Include Indian Government Bonds in global bond indices.
What are the Challenges in Achieving the Aspirational Goals of RBI?
- Conflict of Roles:
- Balancing the conflict between domestic monetary policy goals and the role as an international reserve currency issuer.
- The Triffin dilemma, which might present a challenge in maintaining stability in India’s domestic economy while meeting global demand for the rupee.
- Exchange Rate Volatility:
- Opening the currency to international markets can increase volatility in the exchange rate, especially initially. Fluctuations can impact trade and investments, affecting economic stability.
- The rupee’s internationalization will lead to increased demand for the currency in global markets, potentially making Indian exports more expensive.
- Market Share:
- The daily average share of the rupee in the global forex market is only about 1.6%, while India’s share of global goods trade is around 2%. The challenge lies in increasing the share of Indian products in the competitive global market.
- Convertibility:
- The lack of full convertibility of INR for capital transactions will limit its extensive use in international trade and finance.
- Cybersecurity:
- Digital payment systems are susceptible to cyberattacks, which can lead to fraud and financial loss. Robust security measures are essential to protect user data and ensure transaction safety.
- Banking Sector Health:
- Indian banks, especially public sector ones, struggle with a high percentage of non-performing assets (loans unlikely to be repaid), making them less resilient in absorbing shocks during a global financial crisis.
Steps to Reach the Aspirational Goals of RBI
Full Capital Account Convertibility:
- According to the Tarapore committee, the objective is to achieve full convertibility by 2060, allowing free movement of financial investments between India and abroad.
- This would enable foreign investors to buy and sell the rupee more easily, increasing its liquidity and attractiveness. The RBI could use a Tobin Tax as a safeguard against currency speculation.
Preconditions for Capital Account Liberalisation:
- The committee listed several prerequisites including fiscal consolidation, inflation control, low levels of non-performing assets, a low current account deficit, and strengthening of financial markets.
- Specifically, fiscal deficits should be reduced below 3.5%, gross inflation rates should be lowered to 3%-5%, and gross banking non-performing assets should be brought down to less than 5%.
Personal Remittances and Investment Options:
- Introduce a more liberal scheme for personal remittances to facilitate easier foreign exchange transactions.
- Enable foreign investors and Indian trade partners to have more investment options in rupees, promoting its international use and developing the corporate bond market in India.
Trade Settlement Formalities:
- Optimise trade settlement processes for rupee import/export transactions, such as establishing rupee swap agreements with various countries and paying for Russian oil in Indian rupees.
Domestic Banking Expansion:
- Encourage the expansion of domestic banking through licensing reforms and incentivising branch network growth. Support Indian banks in enhancing their global presence through strategic partnerships and acquisitions.
- Provide support similar to that given to Khanij Bidesh India Ltd for banks involved in acquisitions, mergers, and collaborations with foreign banking institutions.
Monetary Policy Framework:
- Conduct a comprehensive review of the monetary policy framework to ensure alignment with the goals of price stability and economic growth.
- Enhance transparency and clarity in monetary policy communication to effectively manage market expectations, such as releasing meeting minutes.
Climate Risks and Resilience Measures:
- Issue guidelines for stress testing asset portfolios to assess climate change risks. Collaborate with financial institutions to develop resilience measures against climate-related risks in payment systems.
- Propose disclosure norms for climate risk reporting and contribute to the development of a standardised government taxonomy.
-Source: Indian Express
