Internationalisation of the Indian Rupee: Expanding Global Footprint

Why in news?

• The Reserve Bank of India (RBI) is embarking on a transformative journey as it approaches its centenary year.
• With a vision to be “future-ready” for India’s rapidly expanding economy, the RBI has outlined an ambitious agenda that aims to redefine its role in the global financial landscape.
• This comprehensive plan includes capital account liberalisation, the internationalisation of the Indian rupee (INR), the universalisation of digital payment systems, and the globalisation of India’s financial sector. Released on June 7, 2024, the framework, titled “Aspirational Goals for RBI@100 in a Multi-Year Time Frame,” lays out the RBI’s strategic objectives to elevate India’s financial ecosystem to new heights.

Capital Account Liberalisation: Unlocking Global Financial Integration

Comprehending Convertibility of Capital Accounts

• The ability to exchange the rupee for any foreign currency and vice versa for capital account transactions is known as capital account liberalization.
• Full capital account convertibility is still a goal, even though India achieved partial current account convertibility in 1991.
• The trade account’s rupee was permitted to fluctuate freely after the 1991 reforms, but capital movements were nonetheless restricted to prevent financial instability.
• A vast array of laws and regulations that permit the unrestricted flow of capital into and out of the nation are necessary for capital account convertibility.
• It involves unrestricted access to international markets for borrowing and selling as well as the capacity to invest in and purchase foreign securities.
• Strong financial infrastructure and a stable macroeconomic climate are necessary for achieving this.

Priorities for Liberalization

• The Tarapore Committee, which was formed to investigate this avenue, outlined a number of prerequisites for accomplishing capital account liberalization:Keeping fiscal restraint in place to guarantee macroeconomic stability is known as fiscal consolidation.Controlling inflation to maintain buying power means keeping it at reasonable levels.
• Minimal Non-Performing Assets:
  • Preserving the banking industry’s health by cutting back on non-performing loans.
• Low Current Account Deficit:
  • To lessen external vulnerabilities, keep the current account deficit to a minimum.
  • Building robust and liquid financial markets to sustain capital flows is known as “strengthening the financial markets.”

RBI’s Approach

• The RBI’s new agenda includes a calibrated approach to opening the capital account, recognising the need for a gradual and measured transition. This involves:
  • Enhancing Accessibility: Facilitating the availability of the rupee to non-residents for cross-border transactions.
  • Promoting Indian MNCs: Encouraging overseas investments by Indian multinational corporations.
  • Interest-Bearing Non-Resident Deposits: Considering the introduction of interest-bearing deposits for non-residents to attract foreign capital.

Internationalisation of the Indian Rupee: Expanding Global Footprint

Priorities for Liberalization

• The Tarapore Committee, which was formed to investigate this avenue, outlined a number of prerequisites for accomplishing capital account liberalization:
  • Keeping fiscal restraint in place to guarantee macroeconomic stability is known as fiscal consolidation.
  • Controlling inflation to maintain buying power means keeping it at reasonable levels.
  • Minimal Non-Performing Assets: Preserving the banking industry’s health by cutting back on non-performing loans.
  • Low Current Account Deficit: To lessen external vulnerabilities, keep the current account deficit to a minimum.
  • Building robust and liquid financial markets to sustain capital flows is known as “strengthening the financial markets.”
  • The advantages of globalization
  • The following are some advantages of the rupee’s internationalization:
    • Diminished Exchange Rate Risk: Reducing the dangers brought on by foreign exchange rate swings.
    • Enhanced Worldwide Impact: Fortifying India’s standing within the international financial system.
    • Improved Investment Opportunities: expanding Indian companies’ access to global capital markets.

Digital Payment Systems: Advancing Financial Inclusion

Expanding Digital Payments

• The RBI is committed to advancing the universalisation of digital payment systems to enhance financial inclusion and streamline transactions both domestically and globally.
• India’s digital payment landscape, led by systems like Unified Payments Interface (UPI), Real Time Gross Settlement (RTGS), and National Electronic Funds Transfer (NEFT), has already made significant strides in transforming how financial transactions are conducted.

Key Initiatives

The RBI’s agenda includes several key initiatives to further promote digital payments:

1. Global Integration: Extending the reach of India’s digital payment systems internationally through participation in bilateral and multilateral payment linkage projects.
2. Central Bank Digital Currency (e-Rupee): Implementing a phased rollout of the e-Rupee to provide a secure and efficient digital currency for both domestic and international use.
3. Increased Domestic Usage: Promoting the adoption of digital payments within India to reduce reliance on cash and improve transaction efficiency.

Addressing Climate Change: Integrating Sustainability into Financial Planning

Climate Risk Management

• Recognising the growing impact of climate change, the RBI’s agenda includes measures to integrate climate risk management into the financial sector. This involves:
  • Stress Testing: Guiding regulated entities (REs) to stress test their asset portfolios to assess the impact of climate change.
  • Resilience in Payment Systems: Strengthening the resilience of payment systems to climate risks to ensure operational continuity in adverse conditions.
  • Climate Risk Disclosure: Establishing norms for climate risk disclosure by financial institutions to promote transparency and accountability.

Contributions to Sustainability

• These measures aim to:
  • Enhance Risk Management: Helping financial institutions better manage the risks associated with climate change.
  • Promote Sustainability: Encouraging sustainable practices within the financial sector.
  • Support Government Policy: Providing inputs to the government for developing a taxonomy on climate risks.

Conclusion

• The RBI’s aspirational goals reflect a forward-looking approach to positioning India’s financial sector on the global stage.
• By focusing on capital account liberalisation, the internationalisation of the rupee, the universalisation of digital payment systems, and the globalisation of the financial sector, the RBI aims to build a robust and dynamic financial ecosystem that supports India’s fast-growing economy.
• These initiatives underscore the RBI’s commitment to leveraging technology, fostering innovation, and promoting sustainability.
• As the RBI approaches its centenary year, it is set to play a pivotal role in shaping the future of India’s financial landscape, ensuring that it remains resilient, competitive, and aligned with global standards.

People also ask

Q1: What are the RBI’s key initiatives involving the Indian Rupee?
Ans: The RBI’s key initiatives involving the Indian Rupee focus on several strategic areas: capital account liberalisation to enable the free movement of the Indian Rupee for capital transactions, internationalisation to expand its use in global trade and finance, universalisation of digital payments to enhance the Rupee’s role in electronic transactions both domestically and internationally, and financial sector globalisation to promote the Indian Rupee in international financial markets, thereby strengthening India’s economic footprint globally.

Q2: What does capital account liberalisation mean for the Indian Rupee?
Ans: Capital account liberalisation refers to allowing the free conversion of the Indian Rupee into foreign currencies and vice versa for capital transactions. This means individuals and businesses will be able to invest and transact internationally without restrictions, increasing the Rupee’s role in global finance.

Q3:  How does the RBI plan to internationalise the Indian Rupee?
Ans: The RBI’s strategy for internationalising the Indian Rupee includes facilitating its use for cross-border transactions, promoting the opening of Rupee accounts for non-residents, reviewing and potentially reducing taxes on Rupee-denominated bonds (Rupee Masala Bonds), and integrating Indian payment systems with global counterparts to enhance the Rupee’s role in international trade and finance.