T Rabi Sankar, one of the deputy governors at the Reserve Bank of India (RBI) on October 20 made a strong pitch for the internationalisation of the Rupee, listing its advantages and saying the risks associated with the move are unavoidable.
"Internationalisation would make domestic monetary policy more challenging but the alternative of compromising on growth by playing it safe is clearly not an optimal choice," said Rabi Sankar speaking at the Annual day event of the Foreign Exchange Dealers Association of India (FEDAI) at Mumbai).
Elaborating on his point on Rupee internationalisation, Sankar said India needs to calibrate its moves to the evolving size of our economy, particularly the size of the external sector and to the country's appetite for risk in framing policy for external trade and capital flows.
"But the direction is clear," the deputy governor said.
Internationalisation of the Rupee refers to adopting full capital account convertibility. This will mean no restrictions on the amount of Rupee that can be converted into foreign currencies for transactions such as the purchase of assets.
Listing the advantages of Rupee internationalistion, the RBI official said use of Rupee in cross-border transactions mitigates currency risk for Indian business.
“Protection from currency volatility not only reduces cost of doing business, it also enables better growth of business, improving the chances for Indian business to grow globally,” Rabi Sankar said.
Also, it reduces the need for holding foreign exchange reserves. “While reserves help manage exchange rate volatility and project external stability, they impose a cost on the economy,” said Rabi Sankar.
Similarly, another benefit of Rupee internationalization is reducing dependence on foreign currency that will make India less vulnerable to external shocks, Rabi Sankar said.
At the same time, there are challenges, Rabi Sankar added. These include non-residents holding Rupee balances in India to acquire Indian assets. “Large holdings of such financial assets could heighten vulnerability to external shocks, managing which would necessitate more effective policy tools,” Rabi Sankar said.
Secondly, a reduced role for convertible currencies in external transactions could lead to reduced reserve accretion, the deputy governor said.
However, while these risks are real, they are unavoidable if India is to progress to be an economic superpower, Rabi Sankar said.
Explaining the process to internationalise Rupee, the deputy governor said the country needs to promote Rupee for import and export trade and then other current account transactions followed by its use in capital account transactions.
"These are all transactions between residents in India and non-residents. Use of Rupee for transactions between non-residents would be a decisive vote of confidence in Rupee’s Internationalisation, but that is a step which
belongs to the final stages of Rupee Internationalisation, and not a priority
at this stage," Rabi Sankar said.
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