The Modi Government’s strong diplomacy and attempts to boost the Rupee by making it an internationally acknowledged currency for transactions appear to be a right step in the right direction when compared to the American dollar. America’s exploitation of emerging and underdeveloped countries’ currencies is a major source of concern and problem for the rest of the globe.
Economy Suffered Under Previous Governments
Since India was a net importer, particularly due to oil and gold, the economy had suffered. As previous Governments did not make significant efforts to reduce oil imports, we have suffered. Despite the Modi Government’s efforts to lessen dependency by employing renewable energy and electric vehicles, import dependency will not be reduced anytime soon.
How Does International Currency War Work and Its Impact On India?
A currency war is a conflict between nations in which each tries to enhance its exports by further devaluing its currency. Currency conflicts are generally acknowledged to be destructive to all nations that participate in them. While India has not experienced currency wars, we came dangerously near in September 2015 when China purposefully devalued the Yuan. As a result, most emerging markets have devalued their currencies in order to remain competitive in terms of exports. India had no choice but to allow the INR to fall.
RBI’s Action To Strengthen Rupee
Dollar has long been the world’s primary reserve currency, and it is the most extensively used currency in international trade. According to IMF data from Q3 2022 on global holdings of currency reserves, 55 per cent are kept in Dollars, 18.25 per cent in Euros, and roughly 5 per cent each in Yen and Pound. This trend would primarily govern trade. By minimising exchange rate risk, Rupee internationalisation can cut the transaction costs of cross-border commerce and investment operations. The RBI’s actions came as the Indian Rupee hit a record low versus the Dollar almost every day in the aftermath of Russia’s invasion of Ukraine. A fall in India’s currency not only raises the bill for the country’s importers, but also adds further load to local prices in the form of imported inflation. Surging oil prices and a weakening Rupee proved to be a bad mix for the country’s inflation situation in 2022, considering that it imports the majority of its oil.
Dollar’s strength is relative to other currencies and this has made it difficult for many economies to reduce inflation. Such pressures are especially acute in emerging countries, which are more reliant on imports and have a higher share of dollar-invoiced imports than industrialised nations. India also has a large trade imbalance, which means that more Dollars are spent on imports than are earned on exports. Invoicing in Rupees will reduce Dollar outflows, particularly at a time when Rupee is falling in value versus the US Dollar.
Why is Internationalisation of the Indian Rupee Important?
The term ‘internationalisation’ refers to Rupee’s ability to be freely transacted by both residents and non-residents, as well as its role as a reserve currency in worldwide trade. It entails pushing the Rupee for import and export trade, next for other current account operations, and finally for capital account activities.
Boosting India’s Competitiveness
Importers and exporters will profit from increased flexibility because they will no longer have to pay conversion fees or be concerned about the shifting value of the US dollar. Furthermore, purchasing in Rupees would allow Indian importers to purchase cheaper oil. Since the outbreak of the Russia-Ukraine conflict, India has emerged as one of Russia’s main consumers of oil. India imported $19.27 billion in oil from Russia during April to September 2022, up from $2.44 billion in the same period in 2021. A more freely traded Rupee can boost India’s global competitiveness by allowing the currency to reflect the country’s economic fundamentals and lowering the Reserve Bank of India’s need to interfere in currency markets. To guarantee a seamless and effective transition to the internationalisation of the Indian Rupee, policymakers, market participants, and regulators must prepare carefully and coordinate their efforts.
The value of Indian Rupee, or any other currency, is determined by the demand for it. When the demand for a currency rises, so does its value; this is known as appreciation. When the demand for a currency falls, so does its value, which is referred to as depreciation.
As more international investors make investments in India, the demand for Indian currency rises. This is due to the fact that when international investors or corporations invest in India or purchase products from India, they must first convert their currency into Rupees because they can only invest in Rupees in Indian markets. As a result, demand for the Indian Rupee rises, and its value rises against the US dollar and other currencies. When Indian individuals and businesses import something (such as crude oil, gold, etc.), they must pay in Dollars (the de facto world currency). As a result, Indians sell Rupees to buy Dollars because the US Dollar is the currency used to settle international business. As a result, demand for the Dollar rises, and the Rupee falls versus the US currency.
Foreign investors are leaving their assets in India amid the US Fed’s announcement to raise interest rates in the US and the Russia-Ukraine war. When foreign investors redeem their assets in India, they receive their money in Rupees. However, they must convert their holdings (in Rupees) to Dollars. As a result, they will trade Dollars for Rupees. As a result, demand for the Dollar rises, while demand for the Rupee falls. As a result, the value of the Indian currency falls in relation to the US Dollar. In terms of bilateral, trilateral, and multilateral geopolitics and geoeconomics, it appears to say a lot about India. However, before drawing conclusions, the contours must be understood. Despite widespread acceptance of the Indian Rupee as a worldwide currency, it accounts for only 1.6 per cent of daily average global trade.
However, Rupee is still a long way from becoming a reserve currency like the US Dollar, but it is a start. As more nations begin invoicing their exports and imports in rupees, the prospects for bilateral trade with India will improve.
