Internationalisation of the Rupee
The Reserve Bank of India (RBI) has proposed measures to enhance the rupee's use in cross-border trade, aiming for its gradual internationalisation, akin to China's renminbi (RMB) which was included in the IMF's special drawing rights basket in 2016.
Key Conditions for Global Currency Acceptance
- Economic Scale
- The issuing economy needs substantial GDP, trade, and international transactions.
- China meets this with an $18 trillion economy; India, at $4 trillion, does not yet.
- India must sustain a 7-8% growth rate annually to build scale.
- Currency Stability
- Stable currency values are crucial; India has strong macroeconomic stability with low inflation.
- Financial stability has improved with better-capitalized banks and a sound financial system.
- Political stability as a democracy promotes policy credibility and continuity.
- Currency stability involves natural market-driven exchange rates rather than central bank control.
- Liquidity
- The rupee must be easily tradable in large volumes without impacting price.
- India's equity markets are vibrant, but the debt market is shallow due to capital controls.
- Ease in capital controls can enhance market liquidity.
Comparative Insights and Strategic Path
- China's strategy includes capital controls but leverages its dominance in global trade (12%).
- India's share is only about 3% of global trade, with the rupee involved in less than 2% of global forex turnover.
Recommendations for India
- Gradually ease capital controls and adopt a flexible exchange rate with ample hedging options.
- Use GIFT City as an experimental zone for open capital accounts and flexible exchange rates.
- Commit to sustained economic reforms to inspire global confidence in the rupee.
The internationalisation of the rupee aligns with India's goal of becoming an advanced nation by 2047, necessitating deliberate action and reform over the next two decades.
The author is an associate professor of economics at IGIDR, Mumbai, and the views expressed are personal.