Internationalisation of currency may increase exchange rate volatility: RBI Inter-Departmental Group report

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The Reserve Bank of India’s (RBI) Inter-Departmental Group (IDG) in its report on July 5 said internationalisation of currency may pose challenges such as an increase in volatility of exchange rate in the initial phase.

There are monetary policy implications as the obligation of a country to supply its currency to meet global demand may come in conflict with its domestic monetary policies, the report said.

Also, the internationalisation of a currency may accentuate an external shock, given the open channel of the flow of funds into and out of the
country and from one currency to another, report added.

An Inter-Departmental Group (IDG) of the RBI was formed to examine the internationalisation of the rupee.

The report also talks about the benefits of internationalisation of the rupee and the process behind this.

In the process of internationalisation a currency, the report said there is no single factor that determines this process.

Widespread use of a currency outside the issuer’s borders could be due to a combination of factors, such as the size of the economy and centrality to global trade, report said.

Further, the factors impacting the internationalisation is the economic size of a country plays the most vital role in determining the pace of internationalisation.