PMF IAS Current Affairs
PMF IAS Current Affairs

Internationalisation of Rupee

  • Context (IE): RBI appointed a working group to enhance the global acceptance of the rupee.

Major Findings of the Working Group

Rupee has the potential to become an internationalised currency

  • India has shown remarkable resilience despite significant headwinds globally.
  • Higher usage of the rupee in international trade and capital account transactions will give the domestic current a progressively international presence.

Rupee as a designated foreign currency

  • The recent official inclusion of the rupee as a designated foreign currency by Sri Lanka signifies a positive development for the gradual internationalisation of India’s domestic currency.
  • India also has upheld long-standing currency agreements with Bhutan and Nepal that involve the utilisation of the rupee.

Recommendations provided by the working group

Short-term measures

  • Allow non-residents to open rupee accounts. The ability to open accounts outside the country of the currency is a foundational element of the internationalisation of a currency
  • Step up measures for including Indian Government Bonds (IGBs) in global bond indices.
  • Rationalize the FPI regime to facilitate foreign investments into the Indian debt markets (both government and corporate).

Medium-term measures

  • Review withholding tax for masala bonds issuances.
  • Expand the Real Time Gross Settlement (RTGS) system for settling international transactions.
  • Include the rupee in the Continuous Linked Settlement (CLS) system.

Long-term measures

  • Include the rupee in the Special Drawing Rights (SDR) basket.
  • Use bilateral and multilateral payment and settlement mechanisms, such as Asian Clearing Union (ACU), to internationalise the rupee.

Masala Bonds

  • Masala bonds are bonds issued outside India but denominated in Indian Rupees.
  • The term was used by the International Finance Corporation to evoke the culture and cuisine of India.

Continuous Linked Settlement (CLS) system

  • Foreign exchange settlement takes place through multiple layers of accounts across geographies and hence presents a risk of one party defaulting before a transaction has been completed.
  • To avoid the risk while also speeding up the settlement process, a number of major banks banded together to create the CLS system.

Special Drawing Rights (SDR)

  • SDRs are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF).
  • SDRs were created in 1969 to supplement a shortfall of foreign exchange reserve assets (gold & dollars).
  • SDRs are units of account for the IMF and not a currency. They denote a right to currency possessed by member countries of the IMF, allowing them to conduct exchanges.
  • IMF allocates SDRs to countries and they cannot be held or used by private parties.
  • The value of an SDR is based on a basket of five key international currencies reviewed by the IMF every five years:
    1. U.S. Dollar – 43.38%
    2. Euro – 29.31%
    3. Renminbi (Chinese Yuan) – 12.28%
    4. Japanese Yen – 7.59%
    5. British Pound Sterling – 7.44%
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