Internationalization of Rupee

The internationalization of the Indian rupee refers to the process of making the rupee a globally accepted and traded currency. This involves using the rupee for international trade transactions, accepting payments in rupees for exports, and allowing Indian entities to repay global debt obligations in rupees. The internationalization of a currency is a significant step towards greater economic integration and participation in the global financial system.

Key Aspects of Internationalization of Rupee:

1. Payments for Imports and Exports:
• Indian firms should be able to pay for imports in rupees, and when exporting, they should have the option to accept payments in rupees. This simplifies foreign trade transactions and reduces dependence on foreign currencies.
2. Global Bond Issuance:
• Indian entities issuing bonds globally should be able to repay the debt in rupees, regardless of the currency in which the debt was initially contracted. This provides flexibility in managing international debt obligations.
3. Accumulation as Reserve Currency:
• The internationalization of the rupee envisions global acceptance and demand for the rupee as a reserve currency. This means that individuals, companies, and central banks worldwide would hold Indian rupees as part of their reserve holdings.

Benefits of Internationalization of Rupee:

1. Greater Economic Integration:
• The internationalization of the rupee promotes a higher degree of integration of the Indian economy with the rest of the world in terms of foreign trade and international capital flows.
2. Cost Savings for Indian Residents:
• Indian residents can benefit from cost savings on foreign exchange transactions by conducting external transactions in rupees without the need to route them through other foreign currencies.
3. Reduced Dependence on Foreign Exchange Reserves:
• By promoting the use of the rupee in international transactions, there is a potential reduction in the dependence on foreign exchange reserves to maintain balance of payment stability.

Pre-requisites for an International Currency:

For a currency to achieve international status, several pre-requisites need to be met:

1. Full Economic Integration:
• The economy should be fully integrated into the global economy, participating actively in foreign trade and capital flows.
2. Strong Macroeconomic Fundamentals:
• Macroeconomic fundamentals, including economic strength, growth rates, productivity, exports, foreign direct investment (FDI), and resilience, play a crucial role in establishing a currency as an international one.
3. Global Hard Currency Characteristics:
• The currency should possess characteristics of a global hard currency, meaning it should be stable, liquid, and widely accepted in international markets.

The journey toward the internationalization of the rupee involves addressing these factors strategically to enhance the global standing of the currency.

Internationalization of Indian Rupee:

The Indian rupee has been gradually moving towards internationalization, with several initiatives aimed at increasing its acceptance and usage in global transactions. Some key developments include:

1. Masala Bonds (2014):
• Masala bonds, issued in 2014, allowed Indian entities to raise funds in rupees from international investors. These bonds are denominated in Indian rupees, providing an avenue for foreign investors to participate in the Indian debt market.
2. Indo-Japanese Currency Swap (2018):
• In 2018, India and Japan entered into a significant currency swap agreement worth US$ 75 billion. This agreement enables the Indian central bank (RBI) to access yen or dollars as a loan from the Japanese government when needed. It enhances financial stability and provides a liquidity cushion for the RBI.
3. Currency Swap with the UAE (2018):
• Another step towards internationalization was the currency swap agreement between India and the UAE in 2018. This agreement, worth $500 million, allows both countries to settle their trade transactions in their respective national currencies, reducing dependence on third-party currencies like the US dollar.

Challenges in Internationalization:

1. Global Trade Share:
• One challenge is India's relatively lower share in global trade. The internationalization of a currency is often linked to a country's active participation in global trade.
2. Capital Account Convertibility:
• Full internationalization of the Indian currency would require full capital account convertibility. While progress is being made, challenges remain in achieving complete liberalization of the capital account.