Context
There is potential in the government’s unveiling of a long-term framework for further internationalising the rupee. The Indian rupee was extensively accepted as legal cash in the Gulf region until the establishment of the Gulf Rupee and subsequent depreciation, which contributed to the fall of its dominance. The rupee’s value was significantly weakened by the 2016 demonetisation, particularly in nearby nations like Bhutan and Nepal. It is crucial to address the worries of these neighbouring countries if the rupee is to be successfully internationalised.
Reference
GS Paper 3: Indian Economy – Currency
Mains Question
Talk about the difficulties the Indian rupee has had in internationalising, and suggest measures to ensure that it is successfully included into the global foreign exchange market. (150 Words)
Limited International Demand:
India accounts for only 2% of worldwide trade in products, compared to the rupee’s 1.6% share of the world’s foreign exchange market. The demand for trading in the Indian rupee is still minimal, despite various steps being taken to encourage rupee internationalisation, such as authorising external commercial borrowings in rupees and encouraging rupee-based transactions with specific nations. Rupee trade settlement negotiations with Russia have been delayed, in large part because of worries about currency depreciation and a lack of knowledge among traders about available local currency options.
Capital Account Convertibility:
The rupee must be completely convertible, useful, and plentiful in order to qualify as a reserve currency. However, because of historical concerns about capital flight and exchange rate instability brought on by current and capital account deficits, India today puts considerable restrictions on the exchange of its currency. To internationalise the rupee, full capital account convertibility must be attained.
Taking Lessons from China’s Experience:
China’s strategy for internationalising the Renminbi (RMB) offers insightful guidance. China increasingly permitted the use of RMB for a variety of financial and investment transactions, including trade financing. With a number of nations, currency exchange agreements were struck, and the development of offshore markets made RMB transfers easier. The RMB became a recognised currency and a reserve asset throughout time.
Changes to Advance Rupee Internationalisation:
Several changes might be implemented to advance the internationalisation of the rupee:
- Aim for complete convertibility by 2060, enabling unrestricted financial investment flow between India and other countries.
- Create a more extensive and liquid rupee bond market to draw in foreign investors and offer rupee investment options.
- To streamline trade settlement procedures, encourage Indian exporters and importers to invoice transactions in rupees.
- Construct more currency exchange contracts, similar to the one with Sri Lanka, to settle business and financial deals in rupees.
- Provide tax incentives to international companies to promote the use of rupees in Indian operations.
- Maintain stability in currency management and enhance the exchange rate regime to inspire trust.
- To raise the rupee’s profile and acceptability, work to have it recognised as an official currency by international organisations.
- Put into practise the Tarapore Committees’ suggestions, which include lowering the budget deficit, inflation, and the amount of non-performing assets in the banking industry.
Conclusion
The government’s plan for internationalising the rupee is intended to help Indian companies, increase liquidity, and strengthen financial stability. The interests of Indian individuals, businesses, and the government’s capacity to pay deficits should also be taken into account. It’s critical to strike a balance between rupee convertibility and exchange rate stability. The successful internationalisation of the rupee would depend on the adoption of predictable currency management strategies.
