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A working group put together by the Reserve Bank of India said that the rupee should be added to the Special Drawing Rights (SDR) basket and that the foreign portfolio investor (FPI) system should be changed in order to speed up the rupee’s internationalization.
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What is Special Drawing Rights (SDR) basket?
In 1969, the International Monetary Fund (IMF) established the Special Drawing Right (SDR) as a reserve asset. Its value is based on a basket of five main currencies: the euro, the US dollar, the Chinese yuan, the British pound, and the Japanese yen.
The SDR serves as an additional international reserve asset that can be exchanged for currency when necessary. The IMF and other international organisations use it as the unit of account and its value is determined daily based on the exchange rates of the currencies in the basket.
This was made up of gold and foreign currencies that were accepted everywhere. These could be used to buy the local currency on foreign exchange markets to keep the exchange rate fixed.
The rupee would reach a big milestone if it were added to the SDR basket. It would then be recognised as one of the major international currencies. It would make it a stronger global reserve currency, which would help India’s economy and strengthen its place in the global financial system.
What is the Internationalisation of Rupee?
The rupee is becoming more and more used in international deals. This is called “internationalization.” It includes promoting the rupee for import and export trade, as well as other current account transactions, and then using it in capital account transactions.
The goal of the internationalization of the rupee is to make it more common for the Indian currency to be used in exchanges between countries. At the moment, the US dollar is used for most trade and financial activities around the world.
How it will benefit Indian Economy?
- Reduced Volatility in the Currency Exchange Rate
When a currency is utilised extensively in international trade, the value of its exchange rate has a greater likelihood of becoming more stable. The increased demand and utilisation of the rupee in global markets can assist lessen the currency’s volatility, making it more dependable and predictable for use in international trade.
- Impact on World Politics
The internationalisation of the rupee has the potential to increase India’s geopolitical power. As the currency becomes more prominent in international trade, it has the potential to strengthen economic relationships with other nations, make it easier for countries to reach trade deals with one another, and improve diplomatic relations.
- Appreciation of Indian Rupee
The internationalisation of the rupee can lead to an increase in demand for the currency in international trade, which in turn can lead to an increase in the currency’s value. It is anticipated that the value of the rupee will increase as more nations and companies use it for transactions; this will make the rupee a better choice for usage in international business transactions.
- Decline in Transaction costs
The internationalisation of the rupee can lead to a reduction in the transaction costs incurred by Indian firms. This is because Indian enterprises will no longer be required to pay fees associated with the conversion of rupees into foreign currencies in order to conduct international business.
A working committee that was created by the RBI and led by the Executive Director of the RBI, Radha Shyam Ratho, came up with various recommendations for how to speed up the process of internationalisation. One of the most important recommendations is to put the rupee in the SDR basket of the International Monetary Fund.
In order for this to take place, the rupee needs to fulfill not one but two the rupee must satisfy two criteria for this to occur: the export criterion and the freely usable criterion. The export criterion states that the issuing country must be among the top 5 exporters worldwide.
The freely usable criterion stipulates that the currency must be significantly used in international trade and actively traded on the world’s main currency exchange markets.
Despite the fact that internationalising the rupee will be a lengthy process, the RBI’s efforts, along with government support and economic policies, will be crucial to achieving this objective. As India continues to grow as a major economic power, the internationalization of the rupee can be an essential step in strengthening its position on the global stage.
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