#137: Rupee going international?
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What is internalization of a currency?
A process to ensure rise of currency use in cross-border transaction.
How can it be done for Rupee?
- Promoting INR for import and export
- Current and Capital account transactions in INR
History of INR as an international currency
- 1950s: INR was legal tender for almost all transactions in UAE, Kuwait, Bahrain, Oman and Qatar. Such was the influence that Gulf monarchies used to purchase INR with Pound sterling
- 1959: To deal with challenge of gold smuggling, RBI Act amended to create a 'Gulf Rupee', an INR extension meant only for West Asian Region
- 1966: India devalued its currency which led to replacement of Gulf rupee with home countries' currency
What all is needed for making a currency convertible?
Strong swap & forex market
Readily usable & sufficiently available
Further opening up of the currency settlement
Restriction free cross border transfer of funds
Full convertibility of currency on capital account
Advantages
Risk mitigation
Lower cost of doing business
Raises bargaining powers for Indians abroad
Protection from volatility of 'leading' currency
Improves Indian chances to go global with our businesses
Current status
Leading reserve currencies: USD, Euro, Japanese Yen, Pound Sterling
India has full convertibility only on current a/c and not on capital a/c
Capital A/C: Allowing free movement of local financial investment assets into foreign assets and vice versa
Indian efforts
Pushed Indian banks to open Rupee Vostro a/c for banks of Russia, UAE, Sri Lanka and Mauritius
Rupee trade measures instituted with 18 countries
China's experience (currency: RMB)
2007: Dim Sum bonds and offshore RMBD bond market created
2008: Use of RMB for trade finance initiated
2009: Dim Sum bonds to be issued by Hong Kong based financial institution
Eventually, it was used for Investment and then as reserve currency
How did they do it?
1. Offshore use of RMB
a) Current a/c transactions (eg: interest, dividend payments)
b) Select investment transactions (eg: FDI, Outward direct investment)
2. Brazil, UK, Thailand etc. convinced to sign the currency swap agreements
3. RMB investments allowed in debt securities via Central Banks, offshore clearing banks and the participating banks
4. Launched Shanghai Free Trade Zone in September 2013 for free trade between non-residents accounts (onshore and off-shore)
Opinion
Varun Gandhi
The rupee's internationalization cannot make a start without accounting for the concerns expressed by India's neighbors
Way Forward
1. Raise convertibility of INR with aim of full convertibility by 2060
Allows foreign investors to indulge in rupee trade with ease
Enhances liquidity making INR more attractive
2. Encourage Indian businesses to invoice transactions in INR
3. Offer tax incentives to foreign businesses who use INR in operations in India
4. Lobby for official currency status for INR at the international organizations
5. Ensure stability in current management and improve the exchange rate (frequent discontinuation of currency impact stability)
6. Sign currency swap agreements for settling the trade transactions in rupees saving reserves such as those in leading currencies, as of now
Conclusion
The internalization shall help Indian businesses do business abroad. Further, it should benefit Indian citizens, enterprises, and the government's ability to finance deficits. It is a delicate balance to trade off rupee convertibility for exchange rate stability.
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