GS Paper 3
: liberalization of the Indian economy.
Context: RBI dy governor T Rabi Sankar has marked upon the importance of the internationalization of the rupee, its advantages and associated risks.
Internationalization of rupee
It is the process that involves increased use of the rupee in cross-border transactions.
Currently, while the dollar accounts for 88% of international trade, Rupee accounts for less than 1.7% of global trade.
- India currently has full convertibility of the rupee in current accounts such as for exports and imports. However, India’s capital account convertibility is not full. There are ceilings on government and corporate debt, external commercial borrowings and equity.
Need for Internationalization:
Excessive dependence on dollars combined with global inflation and economic crises has led to the depreciation of the rupee to an all-time low. If the rupee is internationalized, India would not have to depend on US Dollars for its trade.
- RBI has allowed domestic traders to settle their import-export bills in rupee.
Advantages of Internationalization:
- Appreciate currency value: It will improve the demand for the rupee in international trade.
- Mitigate exchange rate volatility: Rupee-denominated payments can help reduce price volatility associated with dollars.
- Making significant savings in Indian foreign reserves.
- Circumvent sanctions: Improving acceptance and trade in rupees can help India to diversify its trade basket by circumventing restrictions and sanctions imposed by the west.
- Improve its standing as a global economic power
- Impact on monetary policy: The internationalization of the rupee will limit the country’s ability to create a monetary policy specific to its local economic demand.
- The Indian economy will become more susceptible to international economic fluctuations.
- Managed currency has been utilized to protect the economy from damages during the economic crises of 1980 and 2008. It may not be the case anymore.
- The outflow of Hot money: Complete internationalization of currency will expand the risk of hot currency (highly prone to sudden outflows) to capital assets.
- g., east Asian crisis in 1997.
Steps needed for internationalization of the rupee
- India needs to open its currency to complete capital account convertibility.
- Frame policies cautiously and test them in the Regulatory sandbox environmen
- Bilateral and multilateral trade agreements can be used to test the viability of internationalized rupee e.g. using the Vostro account for Rupee trade with Russia and Iran.
- Improvements in financial fundamentals and steps to improve sovereign credit ratings.
Internationalization of the rupee though with associated risks is inevitable if India is to emerge as a global economic power in a multipolar world.
- Internationalization of rupee- definition/impact
- Current and capital account convertibility.
Q. What do you understand by Capital Account Convertibility (CAA)? There is a debate going on about whether India should go for full CAA or for partial CAA. Examine the advantages and disadvantages of both full and partial CAA. Based on this examination, suggest whether India should go for full CAA or not. (15M)