‘Vehicle currency’. RBI panel moots multi-pronged plan to internationalise rupee

In a bid to achieve internationalisation of the rupee, an inter-departmental group (IDG) of the Reserve Bank of India has recommended a host of measures, including facilitating a Local Currency Settlement (LCS) framework for bilateral transactions in local currencies, and encouraging opening of INR accounts for non-residents, both within and outside India.

The group noted that in a bid to reduce dependence on the US dollar and assert its influence on international trade and finance, China has been continuously making efforts to increase the international use of its currency (renminbi). Drawing on the Chinese experience, the IDG noted the important role that bilateral currency swaps can play in promoting use of INR for settling foreign trade, thereby achieving internationalisation of INR.

The group, chaired by RBI Executive Director Radha Shyam Ratho, also suggested recalibrating the FPI (foreign portfolio investment) regime, providing equitable incentives to exporters for INR trade settlement and allowing banking services in INR outside India through off-shore branches of Indian banks.

The IDG observed that internationalisation of INR is a continuous process involving progressive capital account convertibility, wherein the domestic currency increasingly acquires the character of a de facto freely convertible currency for international financial transactions.

The group emphasised that INR has the potential to become an internationalised currency as India is one of the fastest growing countries and has shown remarkable resilience even in the face of major headwinds. Internationalisation of INR can lower transaction costs of cross-border trade and investment operations by mitigating exchange rate risk.

Over the short-term, IDG recommended nine measures, including designing a template and adopting a standardised approach for examining the proposals on bilateral and multilateral trade arrangements for invoicing, settlement and payment in INR and local currencies, and making efforts to enable INR as an additional settlement currency in existing multilateral mechanisms.

The group opined that opening of INR accounts for non-residents (other than nostro accounts of overseas banks) both in and outside India should be encouraged. Indian payment systems should also be integrated with other countries for cross-border transactions.

IDG suggested facilitating the launch of BIS Investment Pools (BISIP) in INR and inclusion of government securities in global bond indices. It also called for recalibrating the FPI regime and rationalising/ harmonising the extant of Know Your Customer (KYC) guidelines.

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Over the medium-term horizon, the group recommended a review of taxes on masala bonds, examination of taxation issues in financial markets to harmonise tax regimes of India and other financial centres, and allowing banking services in INR outside India through off-shore branches of Indian banks.

Over the long term, the group said India will achieve higher level of trade linkages with other countries and improved macro-economic parameters, and INR may ascend to a level where it would be widely used and preferred by other economies as a “vehicle currency”.

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