70^th BPSC Mains

Approach In Introduction, explain the meaning of the Internationalization of Rupee. Discuss advantages and risks of it. Conclude suitably.

Introduction

The internationalization of the Indian Rupee (INR) refers to promoting its use in cross-border trade, investments, and financial transactions without the need to convert into a dominant foreign currency like the US dollar. India has taken decisive steps to elevate the rupee’s global profile through policy liberalization, digital integration, and bilateral cooperation. However, this shift comes with strategic challenges that must be carefully navigated.

Body

• Key Advantages of Rupee Internationalization:
  • Reduced Currency Risk for Indian Businesses: INR-based settlements protect Indian exporters and importers from exchange rate fluctuations and dollar-denominated volatility.
  • Lower Dependence on Foreign Exchange Reserves: Reduced reliance on hard currencies like the USD decreases the burden of maintaining large forex reserves for transactional security.
  • Improved Fiscal Management: INR’s global acceptance can allow the government to issue rupee-denominated bonds abroad, reducing exposure to external debt risks.
  • Boost to India's Global Trade Aspirations: Direct rupee trade with partners like Russia, UAE, Sri Lanka, and Mauritius enhances bilateral trade without third-party currency mediation.
  • Wider Financial Market Participation: As global entities begin holding INR assets, it strengthens India’s capital markets and deepens investor engagement.
  • Strategic Moves by RBI and Government:
    • RBI has enabled Special Vostro Rupee Accounts (SVRAs) with 22 countries for rupee-based settlements.
    • In 2023–24, FEMA rules were amended to permit INR account opening abroad and rupee-based capital account transactions.
    • Exporters are now allowed to open foreign currency accounts abroad for better trade facilitation.
• Challenges and Risks Involved:
  • Exchange Rate Volatility: Wider exposure may increase currency speculation and short-term volatility in the foreign exchange market.
  • Partial Capital Account Convertibility: The rupee remains non-convertible on the capital account, limiting its acceptance in global financial markets.
  • Monetary Policy Conflicts (Triffin Dilemma): Meeting global currency demand could undermine domestic monetary stability and inflation control mechanisms.
  • Liquidity and Limited Global Usage: The rupee lacks the liquidity and volume of currencies like USD or Euro, restricting its utility for large-scale global settlements.
  • Exposure to External Financial Shocks: Open capital flow channels could render India more vulnerable to sudden capital flight and macroeconomic instability.
• Recent Institutional and Policy Developments:
  • RBI's Strategic Action Plan 2024–25 includes promoting INR-denominated lending and allowing INR account openings abroad.
  • Adoption of UPI in countries like UAE, Singapore, and France is helping project India’s digital financial strength globally.
  • MoUs signed with central banks of Indonesia, UAE, and Maldives for local currency settlement mechanisms.
  • The SPECTRA platform streamlines External Commercial Borrowing (ECB) approvals, promoting rupee financing.
• Way Forward:
  • Integrate UPI, NEFT, RTGS into global payment systems for smoother INR transactions.
  • Inclusion of INR in the SDR basket and CLS settlement systems for higher global recognition.
  • Promote currency swaps and local currency settlement mechanisms to reduce external vulnerability.
  • Create a 24x5 global INR trading ecosystem and ease access for foreign investors through harmonized KYC norms.

Conclusion

The internationalization of the rupee is a strategic imperative aligned with India's goal of emerging as a global economic leader. While its benefits include financial resilience, trade facilitation, and monetary autonomy, the risks necessitate gradual integration, institutional preparedness, and global partnerships. With carefully sequenced reforms and digital innovation, India can position the rupee as a credible and stable international currency.