Learning This Week: Internationalization of the Indian Rupee
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We have been hearing about the internationalisation of the Indian rupee from the RBI in the recent past.
It is a process that involves increasing the use of the local currency in cross-border transactions. It aims to make the rupee more widely accepted for international trade and transactions.
The Key Steps
Promoting the rupee for import and export trade, initially, and then extending its use to other current account transactions, followed by its application in capital account transactions.
Allowing rupee-based trade settlements and increasing the rupee's use in international markets. The RBI has established the mechanism for the settlement of the rupee trade with as many as 18 countries.
Concluding agreements for currency exchange with other nations and enabling direct foreign investment in Indian markets
Liberalizing capital controls to increase the rupee's liquidity and appeal as a medium of exchange for international trade.
Benefits
Reducing India's dependence on US Dollar for international trade and transactions
Appreciating the currency value by improving demand for the rupee in international trade
Enhancing India's geopolitical influence by strengthening economic ties with other countries and facilitating bilateral trade agreements
Challenges
Limited international demand for the rupee compared to India's share in global trade
Concerns over convertibility as the rupee is not fully convertible, restricting its widespread use in international trade and finance.
Increased Currency Volatility: Opening the rupee to international markets may initially increase its volatility.
Summary
While the internationalisation of the rupee is a significant development in India's economic policy, it is a gradual process with both opportunities and challenges. India needs to address the risks associated with currency volatility and ensure the success of this initiative.
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