Economy

Published: July 6, 2023
Updated: July 6, 2023

RBI Panel Proposes Measures to Internationalize the Rupee and Reduce Dollar Dependency

An inter-departmental group (IDG) formed by the Reserve Bank of India (RBI) has recommended steps to promote the internationalization of the Indian rupee and reduce reliance on the US dollar. Led by Radha Shyam Ratho, the panel suggests short-term, medium-term, and long-term strategies to increase the use of the rupee in transactions outside the country. Capital account convertibility is not deemed a prerequisite for internationalization, as the current level of convertibility provides sufficient room for initiating these measures. Recent geopolitical developments, coupled with India's growing trade and capital connections with the world, have set the stage for the emergence of the rupee as a potential international currency.

Short-term Recommendations:

In the short term, the IDG recommends the adoption of a standardized approach for invoicing, settlements, and payments in rupees and local currencies. Efforts should be made to include the rupee as an additional settlement currency in existing multilateral mechanisms such as the Asian Clearing Union. Encouraging the opening of rupee accounts for non- residents, both in India and abroad, is also crucial. Additionally, the report suggests strengthening financial markets by establishing a 24x5 global rupee market and positioning India as a hub for rupee transactions and price discovery.

Medium-term Recommendations:

Over the next two to five years, the IDG proposes waiving the withholding tax on Masala bond issuances. This step aims to make rupee-denominated external commercial borrowing through Masala bonds more cost-effective. Exploring the use of real-time gross settlement for international and cross-border transactions is another recommended measure to enhance efficiency.

Long-term Goal:

The long-term objective identified by the report is to include the rupee in the International Monetary Fund's special drawing rights basket. This milestone would further elevate the status of the rupee on the international stage.

Benefits of Internationalization:

The internationalization of the rupee offers numerous advantages. It enables exporters and importers to limit exchange rate risks and allows domestic firms and financial institutions to access international financial markets without assuming such risks. Moreover, a more efficient financial sector can reduce the cost of capital, promote capital formation, and contribute to economic growth and reduced unemployment.

Challenges and Implications:

The report acknowledges that internationalization may initially make the rupee's exchange rate more volatile. Balancing the country's obligation to supply its currency to meet global demand with domestic monetary policies may pose challenges for monetary authorities. However, the benefits of internationalization, including limited exchange rate risks, lower capital costs, high seigniorage, and reduced foreign exchange reserve requirements, outweigh these costs.

Motive is to reduce reliance on US dollars

The RBI panel's recommendations highlight the potential for the internationalisation of the Indian rupee and reducing reliance on the US dollar. By implementing short-term, medium- term, and long-term measures, such as standardized invoicing, expanded settlement mechanisms, and increased global accessibility, India can strengthen the position of the rupee in international transactions. These efforts align with India's growing economic prominence and its resilience in the face of global headwinds. The roadmap proposed by the IDG lays the foundation for a more internationally recognized and utilized rupee, benefiting exporters, importers, and the overall economy.