Aspirational Goals of RBI | 11 Jun 2024

Source: IE

Why in News?

Recently, the Reserve Bank of India (RBI) has outlined several aspirational goals in preparation for India's fast-growing economy, aiming to be "future-ready" by the time it reaches its centenary year, RBI@100.

What are the Aspirational Goals of RBI?

• Capital Account Liberalisation and INR Internationalisation:
  • Capital Account Convertibility: Proposed full capital account convertibility, allowing free conversion between the rupee and foreign currencies for capital transactions.
  • Internationalisation of the Rupee: Enabling non-residents to use the rupee for cross-border transactions and enhancing rupee account accessibility for persons outside India.
  • Calibrated Interest-Bearing Non-Resident Deposits: Adopting a careful approach toward interest-bearing deposits for non-residents.
  • Promotion of Indian MNCs and Global Brands: Supporting overseas investments by Indian multinational corporations.
• Digital Payment System Universalisation: 
  • Domestic and Global Expansion: Expanding the use of India's digital payment systems (UPI, RTGS, NEFT) domestically and internationally, and linking payment systems with other countries.
    • The starting point can be integrating Indian payment systems with those of other countries.
  • Central Bank Digital Currency (e-Rupee): Phased implementation of the e-Rupee.
• Globalisation of India’s Financial Sector:
  • Domestic Banking Expansion: Aligning banking sector growth with national economic growth.
  • Top Global Banks: Aiming to position 3-5 Indian banks among the top 100 global banks in terms of size and operations and positioning the Reserve Bank as a model central bank of the global south.
  • Support for GIFT City: Assisting the International Financial Services Centres Authority (IFSCA) in making GIFT City a leading international financial hub.
• Monetary Policy Framework Review:
  • Balancing Act: Addressing the balance between price stability and economic growth from an Emerging Market Economy perspective.
  • Policy Communication: Refining monetary policy communication and addressing spillovers from debt overhang in important economies.
• Climate Change Initiatives: Providing guidance for stress testing asset portfolios, strengthening payment systems against climate risks, and proposing disclosure norms and a government taxonomy for climate risks.

• Short and Medium-Term Measures:

  • Trade Arrangements: Standardizing approaches for bilateral and multilateral trade invoicing, settlement, and payment in rupee and local currencies. 
  • Financial Market Strengthening: Fostering a global rupee market and recalibrating the foreign portfolio investor regime.
  • Rupee Masala Bonds: Reviewing taxes on rupee masala bonds.
  • Global Bond Indices: Including Indian Government Bonds in global bond indices.

What are the Challenges in Achieving the Aspirational Goals of RBI?

• Triffin Dilemma: It describes the conflict between a country's domestic monetary policy goals and its role as an international reserve currency issuer.
  • The Triffin dilemma could manifest as a conflict between maintaining stability in India's domestic economy and meeting the global demand for the Rupee. 
• Exchange Rate Volatility: Opening up the currency to international markets can increase volatility in its exchange rate, especially in the initial stages. Fluctuations can impact trade and investments, affecting economic stability.
• Impact on Export: The Rupee’s internationalisation will leads to increased demand for the currency in global markets, which may make Indian exports costly.
• Limited International Demand: The daily average share for the rupee in the global forex market is only around 1.6%, while India’s share of global goods trade is ~2%. The challenge lies in increasing share of Indian products in the competitive global market.
• Convertibility Concern: The absence of full convertibility  of INR for capital transactions will restrict its widespread use in international trade and finance.
• Cybersecurity Threats:  Digital payment systems are vulnerable to cyberattacks, which can lead to fraud and loss of money.  Building trust requires robust security measures to protect user data and ensure the safety of transactions.
• High Non-Performing Assets (NPAs): Indian banks, particularly public sector ones, struggle with a high percentage of non-performing assets (loans unlikely to be repaid) making them less likely to absorb shock in case of global financial crisis. 

What are the Steps Needed to Reach the Aspirational Goals?

• Convertible of Rupee: As per the recommendation of Tarapore committee, the goal should be of full convertibility by 2060, letting financial investments move freely between India and abroad.
  • This would allow foreign investors to easily buy and sell the rupee, enhancing its liquidity and making it more attractive. Tobin Tax can be used as a safeguard measure by RBI against currency speculation.
• Reforms Suggested by Tarapore Committee:
  • It had listed several preconditions such as fiscal consolidation, inflation control, low level of non-performing assets, low current account deficit and strengthening of financial markets for achieving capital account liberalisation.
  • Strong Fiscal Management: Such as reducing fiscal deficits lower than 3.5%, reducing gross Inflation rate to 3%-5%, and reducing gross banking non-performing assets to less than 5%.
  • Liberalised Scheme for Personal Remittance: The introduction of a more liberal scheme for personal remittances to facilitate easier transactions for individuals dealing with foreign exchange.
• Pursue a Deeper Bond Market: Enabling foreign investors and Indian trade partners to have more investment options in rupees, enabling its international use apart from  developing the corporate bond market in India.
• Increase Rupee in International Trade: Optimising the trade settlement formalities for rupee import/export transactions would go a long way. For example rupee swap agreements with various countries, payment of Russian oil in Indian rupee etc.
• Globalisation of India’s Financial Sector: Encourage domestic banking expansion through licensing reforms and incentivise branch network expansion. Support Indian banks in enhancing their global presence through strategic partnerships and acquisitions. 
  • For example, similar to the support provided to Khanij Bidesh India Ltd  support could be provided to banks for acquisition, merger and collaboration with foreign banking institutions. 
• Monetary Policy Framework Review: Conduct a comprehensive review of the monetary policy framework to ensure it aligns with the goals of price stability and economic growth.
  • Enhance transparency and clarity in monetary policy communication to manage market expectations effectively. For example releasing of meeting minutes.
• Climate Change Initiatives: Issue guidelines for stress testing of asset portfolios to assess climate change risks. Work with financial institutions to develop resilience measures against climate-related risks in payment systems. Propose disclosure norms for climate risk reporting and contribute to the development of a standardised government taxonomy.