{"id":36247,"date":"2023-07-07T03:08:10","date_gmt":"2023-07-06T21:38:10","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=36247"},"modified":"2025-04-21T16:40:17","modified_gmt":"2025-04-21T11:10:17","slug":"internationalisation-of-rupee-why-and-what-are-the-benefits","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/internationalisation-of-rupee-why-and-what-are-the-benefits\/","title":{"rendered":"Internationalisation of rupee: Why and what are the benefits?"},"content":{"rendered":"<h3><strong>What\u2019s in today\u2019s article?<\/strong><\/h3>\n<ul>\n<li><strong>Why in News?<\/strong><\/li>\n<li><strong>The Internationalisation of the Rupee<\/strong><\/li>\n<li><strong>Why does the US dollar enjoy an \u2018Exorbitant Privilege\u2019 and its obvious Challenger?<\/strong><\/li>\n<li><strong>The RBI\u2019s Recommendations<\/strong><\/li>\n<li><strong>Advantages of Internationalisation of the Rupee<\/strong><\/li>\n<li><strong>Way Ahead<\/strong><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>Why in News?<\/strong><\/h2>\n<ul>\n<li>According to the Reserve Bank of India\u2019s (RBI) inter-departmental group (IDG), the rupee has the potential to become an internationalised currency.<\/li>\n<li>These recommendations are significant, with India remaining one of the fastest-growing countries and showing remarkable resilience in the face of major headwinds.<\/li>\n<\/ul>\n<p><strong>\u00a0<\/strong><\/p>\n<h2><strong>The Internationalisation of the Rupee:<\/strong><\/h2>\n<ul>\n<li><strong>Meaning:<\/strong>\n<ul>\n<li>Internationalisation is a process that <strong>involves increasing the use of the rupee in cross-border transactions. <\/strong>These are all transactions between residents in India and non-residents.<\/li>\n<li>It involves &#8211;\n<ul>\n<li>Promoting the rupee for<strong> import and export trade<\/strong> and then other <strong>current account transactions <\/strong>(measures imports and exports of goods and services, etc),<\/li>\n<li>Followed by its use in <strong>capital account transactions &#8211; <\/strong>measures cross-border investments in financial instruments, etc.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li><strong>It is closely interlinked with:<\/strong>\n<ul>\n<li>The nation\u2019s economic progress,<\/li>\n<li>Further opening up of the currency settlement and a strong swap and forex market,<\/li>\n<li><strong>Full convertibility<\/strong> of the currency on the capital account and<\/li>\n<li>Cross-border transfer of funds without any restrictions.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Currently,<\/strong>\n<ul>\n<li><strong>The US dollar, the Euro, the Japanese yen<\/strong> and the pound sterling are the leading reserve currencies in the world.<\/li>\n<li><strong>China\u2019s <\/strong>efforts to make its currency renminbi has met with only limited success so far.<\/li>\n<li><strong>India <\/strong>has allowed only full convertibility on the current account as of now.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Need for alternatives:<\/strong> In light of the economic sanctions imposed by the US on Russia for invading Ukraine led to the growing clamour for finding an alternative to the US dollar for international transactions.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>Why does the US dollar enjoy an \u2018Exorbitant Privilege\u2019 and its obvious Challenger?<\/strong><\/h2>\n<ul>\n<li><strong>The dollar\u2019s position is supported by a range of factors<\/strong>, including &#8211;\n<ul>\n<li>The size of the US economy,<\/li>\n<li>The reach of its trade and financial networks,<\/li>\n<li>The depth and liquidity of US financial markets, and<\/li>\n<li>A history of macroeconomic stability and currency convertibility.<\/li>\n<li>Dollar dominance has also benefited from the lack of viable alternatives.<\/li>\n<\/ul>\n<\/li>\n<li>The obvious challenger to the US dollar dominance is the <strong>Chinese Renminbi<\/strong>. However, its ability to rival the US dollar will depend on &#8211;\n<ul>\n<li>Future policies in both the US and China and<\/li>\n<li>The ability of the Chinese economy and its financial system to demonstrate the same long-term resilience, integrity, transparency, openness and stability.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>The RBI\u2019s Recommendations:<\/strong><\/h2>\n<ul>\n<li><strong>For the short term,<\/strong>\n<ul>\n<li><strong>Adoption of a standardised approach<\/strong> for examining the proposals on bilateral and multilateral trade arrangements.<\/li>\n<li><strong>Encouraging the opening of the rupee accounts<\/strong> for non-residents both in India and outside India and integrating Indian payment systems with other countries for cross-border transactions.<\/li>\n<li><strong>Strengthening the financial market<\/strong> by fostering a global 24\u00d75 rupee market and recalibration of the FPI (foreign portfolio investor) regime.<\/li>\n<li><strong>A review of taxes on masala<\/strong> (rupee-denominated bonds issued outside India by Indian entities) bonds, international use of Real Time Gross Settlement (RTGS) for cross-border trade transactions, etc.<\/li>\n<\/ul>\n<\/li>\n<li><strong>For the long term<\/strong>,\n<ul>\n<li>Efforts should be made for the inclusion of the rupee in International Monetary Fund\u2019s (IMF) <strong>special drawing rights<\/strong> (SDR).<\/li>\n<li>The SDR is an<strong> international reserve asset<\/strong> created by the IMF to supplement the official reserves of its member countries.<\/li>\n<li>The value of the SDR is based on a basket of <strong>five currencies<\/strong> [the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling].<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>Advantages of Internationalisation of the Rupee:<\/strong><\/h2>\n<ul>\n<li><strong>Mitigates currency risk for Indian businesses: <\/strong>The use of the rupee in cross-border transactions will protect Indian businesses from currency volatility.\n<ul>\n<li><strong>This will reduce the cost of doing business<\/strong>, enable better growth of business and improve the chances for Indian businesses to grow globally &#8211; <strong>helping to raise the stature of India and its economy globally.<\/strong><\/li>\n<\/ul>\n<\/li>\n<li><strong>Reduces the need for holding foreign exchange reserves: <\/strong>While reserves help manage exchange rate volatility and project external stability, they impose a cost on the economy.<\/li>\n<li><strong>Reducing dependence on foreign currency: <\/strong>It will make India less vulnerable to external shocks.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>Way Ahead:<\/strong><\/h2>\n<ul>\n<li><strong>India\u2019s past fears of capital flight<\/strong> (outflow of capital from India due to monetary policies\/lack of growth) and exchange rate volatility (given significant current and capital account deficits), <strong>does not permit full capital account convertibility<\/strong>.<\/li>\n<li>Therefore, the<strong> Tarapore Committees\u2019<\/strong> recommendations of 1997 and 2006 (reducing fiscal deficits to below 3.5%, gross inflation rate to 3%-5% and gross banking NPAs to below 5%) must be pursued before full capital account convertibility.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<hr \/>\n<h3><strong>Q1) What do you mean by full convertibility of rupee?<\/strong><\/h3>\n<p>Full convertibility of rupee means the right of a resident to convert rupee into foreign currency and vice versa for all purposes &#8211; both current account transactions and capital account transactions.<\/p>\n<p>&nbsp;<\/p>\n<h3><strong>Q2) What are currency swap agreements?<\/strong><\/h3>\n<p>Currency swaps are financial contracts between two parties to exchange a specific amount of one currency for an equivalent amount of another currency. The purpose of currency swaps is to reduce currency risk, achieve lower financing costs, or gain access to a foreign currency.<\/p>\n<p>&nbsp;<\/p>\n<hr \/>\n<p><strong>Source:\u00a0<\/strong><a href=\"https:\/\/indianexpress.com\/article\/explained\/explained-economics\/internationalisation-rupee-benefits-meaning-explained-8787412\/\" target=\"_blank\" rel=\"nofollow noopener\"><u>Internationalisation of rupee: Why and what are the benefits?<\/u><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Internationalisation is a process that involves increasing the use of the rupee in cross-border transactions<\/p>\n","protected":false},"author":5,"featured_media":36248,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[],"class_list":{"0":"post-36247","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/36247","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=36247"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/36247\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/36248"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=36247"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=36247"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=36247"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}