Reserve Bank deputy governor T Ravi Sankar is right to say that there is no alternative to the internationalisation of the Indian Rupee (INR) despite the domestic monetary challenges it will pose. The use of INR in cross-border transactions is expected to mitigate currency risks for Indian businesses. It will reduce the need for holding large foreign exchange (forex) reserves. At the same time, a globally exchangeable INR will make India less vulnerable to external trade and financial shocks while it will add to the bargaining power of Indian businesses. “Internationalisation (of INR) will make monetary policy more challenging, but compromising on growth is not an optimal choice,” Ravi Sankar said. However, the RBI deputy governor did not explain what is holding India back from making INR an acceptable currency for global transactions. Only last month, the International Monetary Fund (IMF) projected India as the world’s fifth-largest economy, overtaking the United Kingdom (UK). The country’s GDP is now behind only the United States (US), China, Japan, and Germany.
India is among the world’s top 13 importers and exporters. Yet, its currency remains soft, struggling to maintain its value about other currencies with its low demand in the forex markets. Global hard currencies rarely depreciate suddenly or fluctuate greatly in value. The world’s major trading currencies are US Dollar, Euro, Japanese Yen (JPY), British Pound Sterling (GBP), Australian Dollar (AUD), Canadian Dollar (CAD), Swiss Franc (CHF), Chinese Yuan (Renminbi; CNY), Swedish Krona (SEK), New Zealand Dollar (NZD), and Mexican Peso (MXN). The USD and Euro are the world’s most preferred foreign currencies. A major trading currency is also linked with the nature and volume of foreign trade of a country, its trade, and its current account balance. The latter stands for the trade balance plus net factor income such as interest and dividends from the country’s investments abroad, earnings from services, freight, and insurance from international trade, and workers’ remittances. While India is one of the world’s major importing countries along with the US, China, Germany, Japan, the UK, the Netherlands, France, Hong Kong, South Korea, Italy, and Mexico, its export ranking stands well below at 13th. The country has been constantly running high trade and current account deficits although, in terms of the current account balance as a percentage of GDP, India fares well compared with several advanced economies, including the US and UK.
Finally, it may be worth taking a speculative risk of monetary challenges that may be linked with the internationalization of INR. To transform INR into an international currency, RBI and the Government must work together to stabilise the value of the Rupee. That is very important, for now. If the rupee is used for international trade and monetary transactions by interested countries and forex traders around the world, it will help reduce India’s trade deficit and strengthen its position in the world market. RBI has, in a circular on July 11, permitted international trade settlement in INR. It also permitted trading partner nations to invest ‘surplus balance’ in Government securities. This is certainly an encouraging step for converting INR as a global and reserve currency. Conversion of any currency into forex always involves a speculative risk. To make INR a global currency, the risk is worth taking.