The internationalization of our Indian Rupee is a process of using our local currency in cross-border transactions. The intent only goes to promote the Rupee for import and export trade. The Indian Rupee Internationalisation seems inevitable given the growing confidence in the Indian economy on the international stage. All of this has been made possible by the reforms initiated by the Modi government. Also, bookmark us for the latest business news for your daily updates.
Indian Rupee Internationalisation, Why it is Important?
Promoting international trade in national currencies will help insulate the rupee from volatility and reduce the cost of doing business in global markets, said the Economic Survey. The survey shows that it can help Indian exporters get prepayments in rupees from foreign customers and, in the long run, promote the local currency to become a single international currency, when the rupee payment mechanism gained ground.
In July 2022, the Reserve Bank of India issued a circular allowing for additional arrangements on invoicing, payment, and settlement of import/export goods in Indian Rupees (INR) to promote growth and follow the path of Indian Rupee Internationalisation. In global trade, India’s focus on exports, and supporting the growing interest of the global trading community in rupees as an international currency.
Payments in international rupees are gaining importance amid aggressive interest rate hikes and a hawkish stance by the US Federal Reserve.
What are Government Agencies Doing in this Regard?
Mr. Karad informed that as per records, the RBI had approved “domestic and foreign AD Banks in 60 cases for opening SRVAs of banks from 18 nations — Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, and the United Kingdom.”
From the 18 countries mentioned in response, Russia has been vocal in using trade in local currency for the overall process of “de-dollarisation”.
However, India has been supporting the idea of trade in local currency mainly to boost exports. The process of SVRAs began in July 2022 when the RBI announced that, “it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR.”
India must prepare to curb volatility risks of the international rupee: RBI Deputy Governor.
The news came in the backdrop of the commodities crisis that was triggered by the Western sanctions against Russia after President Vladimir Putin launched the so-called “special military operation” against Ukraine on February 24, 2022.
Trade in local currencies has been mooted as a solution to avoid the current wave of wartime international sanctions that are hampering supply chains and global trade flows.
In the last year, India has finalized trade pacts with partner countries such as the UAE and Australia and begun negotiations with others such as the U.K. & the European Union. Meanwhile, making inroads for the national currency in bilateral and global trade.
Benefits of Indian Rupee Internationalisation
The use of rupees in cross-border transactions helps to reduce foreign exchange risks for Indian businesses. Currency volatility protection not only reduces the cost of doing business but also enables better business growth, thereby improving the chances of Indian businesses expanding their business globally. It reduces the need for foreign exchange reserves. While reserves help manage fluctuations in exchange rates and predict external stability, they come at a cost to the economy.
Lowering the dependency on foreign currency makes India less vulnerable to external shocks. Considering scenarios like – periods of monetary tightening in the United States and the strengthening of the dollar, the overexposure of domestic companies to foreign currencies leads to the actual tightening of the domestic currency.
Reducing the level of currency risk will significantly reduce the pain of capital outflow reversals. As the use of the Rupee becomes more widespread, the bargaining power of Indian companies will improve, adding weight to the Indian economy and enhancing India’s stature and respect.
The Asian Alliance is also exploring the idea of using national currencies for payments. An agreement, whether bilateral or between trading blocs, that gives importers in each country the option of paying in local currency is likely to be popular with all countries and therefore well worth it.
What are the Challenges Indian Rupee going to Face
India is a capital-short country and therefore needs foreign capital to finance its growth. If a substantial portion of its transaction is in rupees, non-residents will keep balances in Indian rupees, which will be used to purchase Indian assets.
Holding so many financial assets can increase vulnerability to external shocks, the management of which will require more effective policy tools. A reduction in the role of convertibles in foreign transactions could lead to a decrease in reserve growth.
However, at the same time, the demand for reserves will also decrease due to the trade deficit financed in rupees. Holding the rupee by non-residents could exacerbate the transmission of external stimuli to domestic financial markets, increasing volatility. For example, a period of global risk aversion could prompt non-residents to convert their holdings into rupees and leave India.
The recent initiative to charge commercial fees in rupees stems from a different global order and requirement, but for true internationalization and wider overseas use of rupees, the opening of Commercial payments in rupees will not suffice.
The Indian Rupee Internationalisation may also require an efficient swap market and a strong foreign exchange market. Further improvement in global economic fundamentals and financial sector health, followed by an increase in country ratings, will also bolster confidence in the rupee, helping it prepare for the next leg of its international journey.