Internationalisation of Rupee

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: U.S. Dollar – 43.38% Euro – 29.31% Renminbi (Chinese Yuan) – 12.28% Japanese Yen – 7.59% British Pound Sterling – 7.44%