The Inter-Departmental Group (IDG) constituted by the Reserve Bank of India to examine issues related to the internationalisation of the Indian rupee has recommended enabling rupee as an additional settlement currency in existing multilateral mechanisms; integrating Indian payment systems with other countries for cross-border transactions; inclusion of G-Secs (or government bonds) in global bond indices; and providing equitable incentives to exporters for rupee trade settlement. A currency can be termed “international” if it is widely accepted worldwide as a medium of exchange.
How did Internationalisation of Rupee Gain Momentum?
The internationalisation of the rupee gathered steam following the Reserve Bank of India’s (RBI) announcement of a mechanism to settle payments for international trade in rupees, especially for India’s exports. The Reserve Bank of India (RBI) allowed invoicing and payments for international trade in Indian Rupee on July 11, 2022. Experts widely believe if the mechanism fructifies then it may go a long way in internationalising the Indian currency rupee in the long run.
Short-Term measures for Internationalisation of Rupee
In the short-run, the members of the Group recommended enabling rupee as an additional settlement currency in existing multilateral mechanisms; integrating Indian payment systems with other countries for cross-border transactions; inclusion of G-Secs (or government bonds) in global bond indices; and providing equitable incentives to exporters for rupee trade settlement.
Long-Term Measures for Internationalisation of Rupee
In the long-run, IDG’s recommendations included a review of taxes on Masala bonds (Masala bonds are rupee-denominated bonds issued outside India by Indian entities); international use of Real Time Gross Settlement (RTGS) for cross-border trade transactions; examining taxation issues in financial markets to harmonise tax regimes of India and other financial centers; and allowing banking services in rupee outside India through off-shore branches of Indian banks.
What set the stage for Internationalisation of Rupee?
The international monetary and financial system has moved towards being multipolar as reflected in the steadily decreasing share of US dollars in foreign exchange reserves of countries, the increasing usage of other currencies in trade invoicing, and settlement, and the emergence of various bilateral and regional economic cooperation agreements.
This, along with recent geopolitical developments, has set the stage for the emergence of various other currencies, including the rupee, as prospective currencies for use in international transactions, it added.
Stating India as one of the fastest-growing countries which showed remarkable resilience even in the face of major headwinds, the IDG said it feels that the rupee has the potential to become an internationalised currency.
It noted the higher usage of the rupee in the invoicing and settlement of international trade, as well as in capital account transactions, will give it a progressive international presence.
Against that backdrop, the IDG said it deliberated on all the issues related to internationalisation of rupee in a granular manner and recommended a set of time-bound steps.
It also noted that the recent initiative taken under the Asian Clearing Union arrangement to introduce rupee as a settlement currency is also a timely step to encourage the use of the currency for multilateral settlement of international trade transactions.
“While we have had INR (rupee) arrangements with Bhutan and Nepal for a long time, the recent decision by Sri Lanka to formally include INR (rupee) as a designated foreign currency augurs well for incremental internationalisation of INR (rupee).”
The IDG was also of the view that internationalisation is a “process rather than an event”, with continuous efforts needed to build upon all the initiatives that have been taken in the past.
(With Inputs From ANI)
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