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Rupee as International Currency

India as the fifth largest economy deserves rupee as international currency.  There are many lessons to learn from the USA, Russia, Europe and China.  — Vinod Johri


Internationalization of the rupee is a process that involves increasing use of the local currency in cross-border transactions. It refers to the process of increasing the use and acceptance of the rupee outside Bharat, for trade, investment, reserve and other purposes. It can have several benefits; however, it also entails several challenges and risks. One of the major hindrances is the currency’s partial convertibility. Full convertibility would mean the rupee exchange rate would be left to market factors without any regulatory intervention. Convertibility will depend on the level of a country’s economic development and how mature its financial markets are. It provides more certainty to residents, who can denominate foreign transactions in their home currency. They can also borrow in foreign markets without incurring exchange rate risk, potentially enabling them to find cheaper funding.

Currently, the US dollar, the Euro, the Japanese yen and the pound sterling are the leading reserve currencies in the world. China’s efforts to make its currency renminbi has met with only limited success so far.

Bharat is aiming to make the rupee a global currency. Pushing for a roadmap towards the internationalisation of the rupee, the Reserve Bank of India’s (RBI) Inter-departmental group (IDG) said with Bharat remaining one of the fastest-growing countries and showing remarkable resilience in the face of major headwinds, the rupee has the potential to become an internationalised currency.

These recommendations are significant, in light of the economic sanctions imposed by the US on Russia for invading Ukraine and the growing clamour for finding an alternative to the US dollar for international transactions.

It involves promoting the rupee for import and export trade and then other current account transactions, followed by its use in capital account transactions. These are all transactions between residents in Bharat and non-residents. The internationalisation of the currency, which is closely interlinked with the nation’s economic progress, requires further opening up of the currency settlement and a strong swap and forex market.

More importantly, it will require full convertibility of the currency on the capital account and cross-border transfer of funds without any restrictions. Bharat has allowed only full convertibility on the current account as of now.

Currently, the US dollar is said to enjoy an ‘Exorbitant Privilege’, which refers to the innumerable benefits that accrue to the US on account of all other countries of the world using the US dollar as their currency in most of their international transactions, among global currencies. The dollar’s position is supported by a range of factors, including the size of the US economy, the reach of its trade and financial networks, the depth and liquidity of US financial markets, and a history of macroeconomic stability and currency convertibility. Dollar dominance has also benefited from the lack of viable alternatives.

According to the RBI’s working group, the obvious challenger to the US dollar dominance is the Chinese Renminbi. However, its ability to rival the US dollar will depend on future policies in both the US and China and the ability of the Chinese economy and its financial system to demonstrate the same long-term resilience, integrity, transparency, openness and stability, which are characteristics of the US economy.

In the wake of the sanctions imposed on the Russian government, its public sector and even individuals linked to the government, many countries have become cautious of the price they may have to pay if they are subjected to similar sanctions by the Western governments. China, Russia and a few other countries have become more vocal in questioning the US dollar-dominated global currency system.

They would like to reduce their reliance on the US dollar and its financial markets as well as their dependence on dominant international payment mechanisms based on the Society for Worldwide Interbank Financial Telecommunications (SWIFT) messaging system.

While reserves help manage exchange rate volatility and project external stability, they impose a cost on the economy. Internationalisation of the rupee reduces the need for holding foreign exchange reserves. Reducing dependence on foreign currency will make Bharat less vulnerable to external shocks. As the use of the rupee becomes significant, the bargaining power of our businesses would improve, adding weight to the economy and enhancing our global stature and respect.

The working group, headed by RBI has recommended a slew of short to long term measures to accelerate the pace of internationalisation of the rupee. For the short term, the group has suggested adoption of a standardised approach for examining the proposals on bilateral and multilateral trade arrangements for invoicing, settlement and payment in the rupee and local currencies, encouraging the opening of the rupee accounts for non-residents both in Bharat and outside Bharat and integrating our payment systems with other countries for cross-border transactions. It suggested strengthening the financial market by fostering a global five-day round-the-clock global rupee market and recalibration of the FPI regime. Over the next two to five years, the group has recommended a review of taxes on masala (rupee-denominated bonds issued outside Bharat by our entities) bonds, international use of RTGS for cross-border trade transactions and inclusion of our Government Bonds in global bond indices. For the long term, the group has recommended that efforts should be made for the inclusion of the rupee in IMF’s SDR. The SDR is an international reserve asset created by the IMF to supplement the official reserves of its member countries. The value of the SDR is based on a basket of five currencies — the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.

With regard to medium-term strategy, the panel said, there is a need to review taxes on Masala bonds and international use of Real Time Gross Settlement (RTGS) for cross-border trade transactions and inclusion of INR as a direct settlement currency in the Continuous Linked Settlement (CLS) system.

Examination of taxation issues in financial markets to harmonise our tax regimes and other financial centres and allowing banking services in INR outside Bharat through off-shore branches of our banks were part of medium-term suggestion given by the Reserve Bank panel.

Promoting international trade in the domestic currency will help in protecting the rupee from volatility and reduce cost of doing business in the global markets, Economic Survey said. The survey suggested that it could assist our exporters in getting advance payments in rupee from overseas clients and in the longer term promote the domestic currency as an international currency once the rupee settlement mechanism gains traction. In July 2022, the Reserve Bank  issued a circular permitting an additional arrangement for invoicing, payment, and settlement of exports/imports in Indian rupees (INR) to promote the growth of global trade with emphasis on exports from Bharat and to support the increasing interest in the global trading community in rupee as an international currency.

The framework involves invoicing of exports and imports in rupee, market-determined exchange rates between the currencies of the trading partner countries, and settlement through special rupee vostro accounts opened with authorised dealer banks in Bharat. International settlement in rupee acquires significance against the backdrop of the US Federal Reserve aggressively hiking the policy rates and its combative stand. The framework could largely reduce the net demand for foreign exchange, the US dollar in particular, for the settlement of current account related trade flows. Further, the use of INR in cross-border trade is expected to mitigate currency risk for our businesses. Following the Russia-Ukraine war and the sanctions imposed by the West, we have been trying to promote rupee trade. Protection from currency volatility not only reduces the cost of doing business but also enables better business growth, improving the chances for our businesses to grow globally. The survey said that it also reduces the need for holding foreign exchange reserves and dependence on foreign currency, making the our economy less vulnerable to external shocks.

In terms of foreign exchange market turnover (daily averages), as per the BIS Triennial Central Bank Survey 2022, the US dollar is the dominant vehicle currency accounting for 88 per cent of the global forex turnover. The rupee accounted for only 1.6 per cent. If the INR turnover rises to equal the share of non-US, non-Euro currencies in global forex turnover of 4 per cent, INR could be regarded as an international currency, reflecting Bharat’s position in the global economy.

Our banks have already opened special vostro rupee accounts (SVRA) with banks of these three nations, operationalising the rupee trade arrangement.

Recently, SBI Mauritius Ltd and People’s Bank of Sri Lanka opened an SVRA with State Bank of Bharat (SBI). In addition, Bank of Ceylon opened an account in its Indian subsidiary in Chennai.

In all, 18 such special rupee accounts have been opened by 11 banks, including 2 of Russia and one of Sri Lanka, following approval from the RBI.

The Reserve Bank of Bharat has allowed more than a dozen banks to settle trades in rupees with 18 countries since last year and is encouraging big oil exporters such as the UAE and Saudi Arabia to South Asian nations to accept the our currency for trade.

The group recommended enabling the rupee as an additional settlement currency in multilateral mechanisms such as the Asian Clearing Union.

It also encouraged the opening of rupee accounts for non-residents both in Bharat and outside the country, and integrating the Rupee payment systems with other countries for cross-border transactions.

India as the fifth largest economy deserves rupee as international currency.  There are many lessons to learn from the USA, Russia, Europe and China. Weaponing currencies and trade and sanctions oriented global trade has boomeranged on such countries as the survival instincts of developing countries have immensely grown over past decade. The long and short term steps taken by RBI in endeavour to establish Rupee as global currency either through measures like RTGS, convertibility, foreigners allowed to hold rupee account, Indian securities in global bond indices, rupee banking services abroad besides cross border rupee trade and SDRs in IMF will surely succeed with appropriate time frame but no haste is solicited. 

(Source : Economic Times, Financial Express, Times of India)

Vinod Johri: Retd. Additional Commissioner of Income Tax. Delhi 

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