The Journey of the Indian Rupee towards Internationalisation

     India’s external sector has shown remarkable progress in the last three decades after the economic liberalization reforms were set in motion. The Indian economy has been more interconnected with the rest of the globe over time in terms of trade and capital flows. India's foreign direct investment rose from 46.6 billion to 84.8 billion during the decade; its imports rose from 489.3 billion to 612.6 billion; and its exports rose from 306 billion to 421.9 billion. This made internationalizing rupees even more necessary.

    India has been trying for the past 1-2 years to bring the internationalization of INR so that, the rupee can be used directly for cross-border transactions in order to reduce the usage of dollars. The Inter-Departmental Group (IDG) was established in December 2021 by Shri. T. Rabi Sankar, Deputy Governor of the Reserve Bank of India, to investigate the issue surrounding the internationalization of the INR and offer a course of action. The Inter-Departmental Group's goal was to assess the INR's current status as a global reserve currency and create a roadmap for its internationalization. The report of the Inter-Departmental Group on the internationalization of INR was released on October 2022. This report was based on the vision of UTKARSH 2022 (To foster confidence in the internal and external value of the rupee and contribute to macroeconomic stability). UTKARSH is a living document that provides the medium-term strategy to the Reserve Bank of India on what strategies to adopt in the coming 2 to 3 years.  UTKARSH was released in July 2019. UTKARSH 2.0, which is the latest version of UTKARSH was introduced in December 2022. It includes the medium-term strategy framework for 2023-25. There are a total of 6 visions presented by UTKARSH 2.0 and the report of the Inter-Departmental Group was based on the third vision ‘enhanced relevance and significance in national and global roles’.

    The Inter-Departmental Group believes that the INR has the potential to be adopted as a global currency because India is one of the nations with the fastest rates of economic growth and has displayed amazing fortitude despite significant obstacles. India has provided 12% of the global growth. India has also advanced significantly in other areas, such as the conversion of its capital account, the integration of global value chains, the establishment of GIFT City (Gujrat International Finance Tech City), and other areas. INR will become more globally present as it is used more frequently for capital account transactions, international trade settlements, and invoicing.

    Meanwhile, the international monetary and financial system has moved towards being multipolar ie, (many currencies are coming up and they are utilized for transactions) as reflected in the steadily decreasing share of the US Dollar in foreign exchange reserves of countries, the increasing usage of other currencies in trade invoicing and settlement and the emergence of various bilateral, regional and economic cooperation agreements ( Recently, an agreement has been signed between India and United Arab Emirates for developing a local currency settlement system ie, Rupees and Dirhams has to be used for the transactions arising between India and United Arab Emirates). Additionally, it has been shown that Local Currency Settlement (LCS) frameworks enable greater use of local currencies in current and capital account transactions, boosting corporate efficiency and lowering reliance on hard currencies like the Dollar, Pound, and Euro.

    Internationalization of the rupee is not an easy task for our country. We have to bear certain costs while internationalizing rupees as it may result in the potential increase in volatility of its exchange rate in the initial stage. This would further have monetary policy implications as the obligation of a country to supply its currency to meet global demand may come in conflict with its domestic monetary policy, popularly known as Triffin Dilemma (conflict between domestic and international policy goals). Also, given the free flow of money into and out of the nation as well as from one currency to another, the internationalization of currency could intensify an external shock. Further, the internationalization of a currency is a long-drawn process involving continuous change and incremental progress, it would enable the timely redressal of associated concerns and challenges as we move forward. Internationalization of the rupee is needed as it will reduce foreign currency reserve requirements for the country as we will not require dollars for the transactions. There are more benefits than costs. So, let’s look forward to the internationalization of the rupee as it provides many advantages to our country.

Rajashree. V, Assistant Professor of Commerce, Al Shifa College of Arts and Science, Kizhattoor, Perinthalmanna