RBI panel moots multi-pronged plan to internationalise rupee

In a bid to achieve internationalization of the rupee, an Interdepartmental Group (IDG) of the Reserve Bank of India has recommended a package of measures, including facilitation of the Local Currency Settlement Framework (LCS) for bilateral transactions in local currencies, and encouragement of opening INR accounts for non-residents, both inside and outside India.

The group noted that in an effort to reduce dependence on the US dollar and assert its influence on international trade and finance, China is constantly making efforts to increase the international use of its currency (Renminbi). Drawing on the Chinese experience, IDG pointed out the important role that bilateral currency swaps can play in promoting the use of INR for foreign trade settlement, thus achieving the internationalization of INR.

The group, chaired by Reserve Bank of India Executive Director Radha Shyam Rathu, also proposed resetting the FPI (Foreign Portfolio Investment) system, providing fair incentives to exporters to settle trade INRs and allowing banking services in INRs outside India through overseas branches of Indian banks.

IDG noted that the internationalization of INR is an ongoing process involving progressive capital account convertibility, as the local currency increasingly takes on the character of ipso facto A freely convertible currency for international financial transactions.

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

In the short term, the IDG recommended nine measures, including designing a model and adopting a standardized approach to vetting proposals for bilateral and multilateral trade arrangements for invoicing, settlement and payment in Indian rupees and local currencies, and efforts to enable INR as an additional settlement currency in existing multilateral mechanisms.

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

IDG proposed to facilitate the launch of BIS Investment Pools (BISIP) in INR and the inclusion of government securities in global bond indices. He also called for a recalibration of the FPI system and the rationalization/harmonization of existing Know Your Customer (KYC) guidelines.

In the medium term, the group recommended a review of taxes on masala bonds, examination of tax issues in financial markets to harmonize tax systems in India and other financial centres, and permit banking services in INR outside India through overseas branches of Indian banks.

In the long term, the group said that India will achieve a higher level of trade links with other countries and improved macroeconomic standards, and the INR may rise to a level that can be widely used and favored by other economies as a “combined currency”.