INTERNATIONALISATION OF RUPEE

 Amid  the background of depreciating exchange rate of Indian rupee against US dollar, increasing current account deficit,outflows of foreign portfolio investments, fiscal deficit and inflation, Reserve Bank of India announced remedial measures like further liberalisation of foreign investment inflows, increasing exports and to stabilise current account, capital account and rupee exchange rate.  Measures can be broadly divided  into four. 1.Providing foreign trade settlement between India and other countries in rupee terms. 2.Offering higher interest rates on fresh Non resident bank and Non resident external deposits until October 31 2022.Banks have also  been exempted from mandatory Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) for incremental NRI deposits till November 4,2022.3.Widening of investible universe of  Government and corporate debts.Quantity and maturity limits on foreign portfolio investment (FPI) in Government securities and corporate bonds have been eased to encourage larger FPI flows into domestic markets. RBI has lifted the 30% foreign investment limit on government and corporate bonds, with  a residual maturity of less than one year until October 31,2022.Number of government securities that foreign portfolio investors can buy through Fully Accessible Route has also raised by RBI. 4.Relaxation of interest rate and amount ceiling for external commercial borrowing loans.Indian corporates who wish to borrow from abroad in foreign currency can now  raise more funds through automatic route ,without prior approval of RBI  as long as they comply with prudential norms of  External commercial borrowing framework. RBI has temporarily increased the limit under the automatic route from$750 million to $ 1.5 billion.All these measures are intended to arrest the sliding of rupee  against US dollar and maintain stability in the external sector.

 India is predominently suffering from the triple problems of rising oil import prices where whopping 80% of domestic consumption is imported, massive outflow of foreign capital and depreciation of rupee against US dollar. In this context rupee denominated export and import trade and gradual internationalisation of rupee offer both opportunities and challenges. According to RBI report  on  currency and finance internationalisation means the rupee can be freely transacted by  both residents and non residents and be used as a reserve currency for global trade.Thus Indian rupee can lower  transaction costs of cross border trade and  investment operations by mitigating exchange risk . However it makes the simultaneous pursuit  of exchange rate stability and a domestically oriented monetary policy more challenging without the deep support of domestic financial markets. Internationalisation can also potentially limit the ability of Central bank to control domestic money supply and influence interest rates as per domestic macro economic conditions.Most important prerequisite for internationalisation of  currency is  price stability. If inflation rate is higher than world average it will undermine the currency as an international medium of exchange and store of value leading to erosion of stability in prices, exchange rate and confidence of international investors in domestic currency.Internationalisation of rupee would do require full capital account convertibility Contrary to full current account convertibility adopted since mid 1990s.  we have followed a gradual and continues approach in opening up the capital account.India's capital sector is progressively liberalised according to the evolving macroeconomic conditions, requirements of industry, individuals and financial sector. RBI allowed cross border trade settlement in Indian rupee under Foreign Exchange Management Act RBI lays out rules that allow India's exports and imports to be denominated and invoiced in Indian rupee using market determined bilateral Exchange rate. Special rupee vostro account for  the partner  trading country's  bank needs to be opened by Indian  bank. Indian importers will need to pay in rupee which will be credited into the special vostro account of the correspondent bank  of the partner country against the invoices for the supply of good or service. Rupee invoiced trade between partner country and  India does not not have to be balanced and in case not balanced RBI allows surplus funds to be invested in Indian capital market. It may  be recalled here that India had rupee denominated trade with erstwhile USSR, and some East European countries during the period 1970s to 1990 and trade did happen using bilaterally agreed exchange rate. 

 Hegemony of major hard currencies like US dollar, British pound , Euro,and Japanese yen in trade invoicing is well-known despite the origin and destination of both imports and exports. Grave asymmetry in trade invoicing is obviously visible where countries very often invoice their trade in vehicle currency that is neither the currency of exporter nor importer.According to one estimate the share of US dollar as an invoicing currency  is around 3.1fold  higher than it's share in world exports.In 1992 20.4% of our exports were invoiced in Indian rupee by 2000 it steeply declined to 0.3%. In 2014 the share of  India's exports invoiced in US dollar accounted for 86.8%  (as against US exports to India only 13%) followed by Euro 7.7% and other currencies 5.5%.Since 2005 India did not report any rupee denominated export. Currently about 90% of our exports are invoiced in US dollar despite Euro and Yen are internationalised.Obviously vehicle currencies especially US $ is very much preferred as a better store of value for trade, commerce and investment.

It may be noted here that a multi pronged strategy needs to be adopted for the success of rupee denominated trade as well as internationalisation of rupee.Firstly trade with individual countries like Russia can be invoiced in rupee,which can be extended to neighbouring countries and free trade agreement partners.As far as internationalisation of rupee is concerned experts observed that the rupee should have asset value along with exchange value.  Full capital account convertibility, existence of deep and sophisticated financial markets and price stability are the most important prerequisite for internationalisation of currency. Incidentally RBI utilised around $ 50 billion to avoid exchange rate volatility and maintain rupee stability.Cumulative outflow of foreign portfolio investment from India for past  nine months amounted to $ 34 billion.Fortunately despite depletion India still have adequate foreign exchange reserves to support 10 months import requirements. While RBI'S capacity to manage volatility is appreciated it would be ideal to allow rupee to freely find its own value whereas government measures like increasing customs duty on gold may be  counter productive resulting in increased smuggling activities. Similarly it is high time to reduce heavy dependence on oil imports  by shifting to eco friendly renewable energy sources. In short maintenance of high growth rate, price stability, manifold increase in invoicing of rupee trade to more countries and major breakthrough in trade and investment flows to the country can lead to internationalisation of rupee and full capital account convertibility.