Trading in local currencies - Internationalisation of The Rupee | 30th November 2022 | UPSC Daily Editorial Analysis | UPSC IAS

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What's the article about?

Relevance:

GS3:Indian Economy and related issues; Effects of Liberalization on the Economy;
Prelims

What is meant by internationalisation of the rupee?

It is a process that involves increasing use of the local currency (ie Rupee) in cross-border transactions.
It involves promoting the rupee for import and export trade and then other current account transactions followed by its use in capital account transactions.

Benefits of internationalization of Rupee:

Use of Rupee in cross-border transactions mitigates currency risk for Indian business.
It reduces the need for holding foreign exchange reserves.
Reducing dependence on foreign currency makes India less vulnerable to external shocks.
It will increase the bargaining power of Indian business across the world.

Challenges in Internationalisation of Rupee:

Internationalization of Indian currency would also require full capital account convertibility.
At present, the rupee is fully convertible in the current account, but partially in the capital account.
- Current and Capital accounts are the two components of Balance of payments.
The dollar accounts for 88.3% of global foreign exchange market turnover, followed by the euro, Japanese Yen and Pound Sterling; the rupee accounts for a mere 1.7%, underlining the need for pushing the currency much farther to get an international tag.

Analysis:

At a time geopolitical tensions are rising and threaten to split the world into “two trade blocs, two financial systems, two currency blocks, two payment systems and two separate world-wide webs” it is natural that countries like India would push settlement of trade in local currencies.
Four months ago, the RBI notified invoicing and settlement of trade transactions in rupees to “support the increasing interest of the global trading community in INR”.
And now Sri Lanka has acceded to India’s request to designate the rupee as an international currency.
Sri Lanka thus can export to India and get paid in the Indian rupee, which can then be used for imports from India.
Of late, corporates in selected jurisdictions have also been utilising non-dollar currencies to procure crude and other commodities like coal to by-pass Western sanctions, striking deals in the renminbi, the Hong Kong dollar and the UAE dirham pairs, according to a SBI research report.
India has prepared a concept paper regarding rupee-dirham trade, and the central banks of both nations are discussing the creation of a mechanism to facilitate settlement in local currencies.

Way Forward:

Although India’s exports of goods and services are growing rapidly, they currently account for only 2.4% of global exports of goods and services.
More critical mass is necessary for internationalisation of the rupee. As indicated in RBI’s payments vision document for 2025, the rupee’s inclusion in the continuous linked settlement initiative, which provides protection for cross-currency settlement in 18 currencies, would help in a big way.

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Trading in local currencies – Internationalisation of The Rupee | 30th November 2022 | UPSC Daily Editorial Analysis