‘A global rupee may raise volatility’

A global rupee may raise volatility’

‘A global rupee may raise volatility’

Context : 

Officials of an Inter-Departmental Group of the RBI warn that the internationalisation of the rupee may conflict with domestic monetary policy, but the group maintains that the advantages of internationalisation much outweigh the different worries.

What does the internationalization of the Indian rupee mean?

  • The US dollar, Euro, Japanese yen, and pound sterling are the world’s major reserve currencies at the moment.
  • The US dollar enjoys significant advantages as the dominant global currency, including widespread use in international trade, a sizable economy, networks of trade and finance, liquidity in US financial markets, and a track record of stability and convertibility.
  • The Reserve Bank of India (RBI) wants to utilise the Indian rupee more frequently in international trade, starting with import and export trade and progressively extending to other current account and capital account activities.

What led to the rising of demand for an alternative source of global currency?

  • The Chinese yuan can compete with the US dollar’s hegemony, but whether it does so will rely on future US and Chinese policies, as well as the toughness and stability of the Chinese economy and financial system.
  • Economic sanctions against Russia by the US and growing apprehension over similar sanctions have led nations like China, Russia, and others to look for alternatives to the US dollar and lessen their reliance on established global payment systems like SWIFT.

What are the possible advantages of internationalization?

  • Promoting the use of the rupee in cross-border transactions has advantages for Indian businesses, including lowering operating costs, facilitating better global business growth, reducing reliance on foreign exchange reserves, and enhancing bargaining power.
  • The option of increasing international trade to third world countries from the developed nations.
  • Western countries who were dependent on the oil from Russia can now approach India without the fear of getting sanctions.
  • By allowing invoicing, settlement, and payment in local currencies, internationalisation can help Indian enterprises involved in international trade and investment decrease exchange rate risk.
  • The cost of financing for local enterprises may decrease as a result of improved access to global financial markets brought on by internationalisation for Indian entities.
  • The term “seigniorage” describes the gain or income a government makes through issuing money. Internationalisation might boost India’s seigniorage advantages by increasing demand for the INR abroad.
  • As transactions can be completed in the local currency, reducing the need for foreign currencies, the internationalisation of the rupee offers the possibility of less reliance on foreign exchange reserves.

What are the recommendations of RBI’s working groups?

  • Short term: Standardised methods for analysing rupee trade agreements, creating accounts in rupees for non-residents, connecting payment systems with those of other nations, and bolstering the rupee market.
  • Medium Term: Reviewing rupee-denominated bond taxation, utilising Real Time Gross Settlement (RTGS) for international trade, and incorporating Indian Government Bonds in global bond indices are all medium-term goals.
  • Long-term: Attempts to add the rupee to the Special Drawing Rights (SDR), a global reserve asset based on a basket of currencies, of the International Monetary Fund (IMF).

What does the cautionary report on the internationalization of the Indian Rupee (INR) by the Inter-Departmental Group (IDG) say?

  • Increased Volatility: The IDG recognises that there may be an increase in INR exchange rate volatility during the early stages of internationalisation. This may be due to a variety of variables, including market speculation, changes in the demand for the rupee on a worldwide scale, and modifications to the dynamics of supply and demand for the currency.
  • The Triffin Conundrum: The paper makes the point that internationalisation can lead to a contradiction between a country’s domestic monetary policy and its duty to supply its currency to fulfil global demand. The Triffin problem, which can result in conflicts between economic goals when a nation’s currency serves as both a domestic unit of account and a global reserve currency, is a common name for this conflict.
  • Increased Impact of External Shocks: According to the IDG, the internationalisation of the rupee may increase the effect of external shocks. This is so that foreign shocks can more easily be transmitted into the local economy, potentially altering stability and economic circumstances, as well as the free flow of capital into and out of the nation and the conversion of currencies.