Internationalization of Currency:
- Currency that is freely available to Non-Residents, to settle cross-border transactions in international markets.
- Internationalization of a currency is an expression of credibility by the countries in the currency as well as in the economy.
- Use of Indian currency to make payments and buy things in a foreign country, merely does not signify Internationalization.
Issues in Internationalization:
Trade Invoicing:
- Over 90% of India’s Exports and Imports are invoiced in Dollars and Euros while the use of the INR is negligible.
- US dollar is the most widely traded currency, representing 45 % of total global transactions, followed by the Euro(16 % ), the Yen(8%) the pound sterling (6%) the remaining percentage is accounted for by other currencies.
FOREX RESERVES :
- Dollar continues to be kept as 60 % of the world FOREX Reserves by countries followed by Euros(20%), Renminbi 3 % and Currencies other than the Pound Sterling and Japanese Yen, constitute less than 10%.
- The Indian currency is held in the reserves only by approximately six out of 130 countries.
World Trade Participation :
India’s share in major exporters is merely 1.8 % and in imports is 2.8 % and the average daily share of the rupee in foreign exchange market turnover is only 1.6 %.
Exchange Rate Volatility :
- Increased volatility in Rupee & Exchange Rate with other currencies is a big hurdle in the Internationalisation of the currency.
- During announcement of Fed Tapering, Rupee depreciated 19.4% in period from may 2013 to August 2013, because of loss of Foreign Reserve.
- This create Current Account Deficit (CAD) which in turn produces bad macroeconomic conditions and negative investors sentiments.
Liberalized Remittance Scheme (LRS):
In 2004, RBI implemented Liberalized Remittance Scheme which provides for Limit of total investment/usage of $2.5 Lakh dollars per year, out of which Limit of investment into foreign stock markets is up to the extent of $25,000 in a year.
Potential disadvantages:
- Internationalisation of a currency increases the vulnerability of currency to the external shocks.
- If large amounts of domestic currency are held by non-residents, particularly at offshore locations, any expectation that the currency is vulnerable due to weak fundamentals, may lead to a sell-off resulting in depreciation of the currency.
Positives :
- It will lead to Lower cost of capital due to better access to International financial markets .
- It will open the gates for domestic companies to raise funds from overseas markets through ECB ( external commercial borrowings ) and FCCB ( foreign currency convertible bonds ) modes, if interest rates look attracting.
- It will result in increase in demand of the currency and will result in High income through Seigniorage.
- Internationalisation will result in Reduced requirement of FOREX reserves as internationalised currency will provide Immunity from BoP crisis .
- Foreign exchange reserves lead to high sterilisation costs and lower the forex ,lower will be the sterlisation cost.USA has forex of only 243 bln $ out of which 200 bln are in the form of SDR and Reserve Tranche.
- It will Mitigate currency risk for Indian businesses and bargaining power of Indian businesses will improve.
- The other benefits of currency internationalisation include an increase in growth by facilitating greater degree of integration both in terms of foreign trade and international capital flows, savings on foreign exchange transactions, reduced foreign exchange exposure, and economies of scale.
OPPORTUNITY FOR INDIA :
- Countries like Bangladesh and S.lanka are running out of dollar so it is an opportunity for India
- Major exporters like Russia ,China ,Middle East -Iran are under US sanction so they cant use dollar for buying so countries use any other currencies .
- India has target of transforming from 5th economic power to 3 global power not depending upon any foreign currency .
Steps taken :
- US used 2 World War, Britain used Colonization ,Euro used institutions for Internationalising their currency and China post global recession of 2008 look towards making it a global currency. Now the Global realities provide opportunity for India to internationalise Rupee.
- In Jul 2023- The Reserve Bank of India Inter-departmental group said that the Indian rupee has the potential to become an internationalised currency.
- The Reserve Bank of India (RBI) has allowed banks from 18 countries to settle payments in the rupee. This includes names like Sri Lanka, Israel, Russia, Germany, Singapore and the United Kingdom.
- Apart from this, 64 other countries have expressed their intent to trade with India in rupee.
- In Jan 2024-Recently India has made its first-ever payment in rupees to the United Arab Emirates (UAE) for crude oil acquisition.
- The new Foreign Trade Policy (FTP) 2023 seeks to promote exports with the implementation of a mechanism for invoicing and settlement of transactions in Rupees on a bilateral basis.
- Sri Lanka settled its debt in Rupee to tide over its precarious economic predicament.
- Initiation of bilateral trade in rupees between India and Bangladesh, was also an attempt to internationalise the rupee.
What can be done :
- Financial stability : Fiscal Deficit should be less than 3.5 while CPI should be below 5 %.
- Capital Account Convertibility should be there as there are restrictions on free flow under the limits defined under LRMS .
- RBI intervenes when rupee depreciates which investors don’t like RBI intervention should be minimised.
- India could learn from China’s strategy . Even though the yuan is not fully convertible, China produces goods that the world wants to buy can enhance the acceptance of a partially convertible currency. So the key is increase exports.
- One of the key recommendations of IDG is to include the rupee in the IMF SDR basket.
- Capital account convertibility and development of offshore centres are other enabling conditions for internationalisation.
- The depth and liquidity of financial market is a very important element in internationalisation.
