The Reserve Bank of India created a stir in the markets on July 11 by allowing banks and traders to invoice and settle global transactions in rupees. The move is seen as a significant step towards internationalisation of the local currency.
The decision may help international demand for the rupee to pick up and reduce demand for dollars to that extent. This would curb depreciation pressures on the rupee and indirectly help in preserving forex reserves, Vivek Kumar, an economist at QuantEco Research, said in an interview with Moneycontrol. Excerpts from the interview:
Why has the RBI announced the settlement of trade in rupees now?
Internationalisation of the rupee has been under discussion at various policy levels for some time now. It is good to see the RBI taking a formal direct step in that direction. However, we need to acknowledge that internationalisation of a currency happens over decades and would involve multitude of other steps like complete capital account convertibility, establishment of rules-based fiscal rectitude, etc.
Will this increase and smoothen bilateral trade ties with Russia, given the rise in market share of imports from Russia? Which other countries would be keen on settling trade with India in rupees?
Once functional, rupee settlement of bilateral trade could enable a smoother process flow with Russia or any other country like Iran, Venezuela, or Sri Lanka, which is facing international sanctions or dollar shortages.
Will there be an incremental benefit on the current account deficit or forex reserves in the near term?
We do not expect any impact on India’s current account deficit due to this move. In the longer run, a potential pickup in international demand for the rupee would reduce demand for dollars to that extent. This would curb depreciation pressures for the rupee and indirectly help in preserving forex reserves, which are predominantly dollar-denominated. However, we need to note that this pertains to current account transactions. Pressure on capital accounts, say because of adverse global conditions, could still put pressure on forex reserves.
Have you changed the outlook on the rupee following the announcement?
Since we see rupee internationalisation as a long-term structural step, we do not expect any near-term impact of this. We continue to expect the rupee to weaken moderately towards 81 to a dollar before the end of FY23.
Is the RBI paving the way for the rupee to become a hard currency?
We believe allowing global trade settlement in rupees is a first major step on the long road of internationalising the currency. This, accompanied by further opening of the economy and upholding of macro credibility, would enable the rupee to become a hard currency in the world. India being the fifth-largest economy has enough economic wherewithal for generating international demand for rupee trade as well as investment in rupee assets.
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