Reserve Bank of India (RBI) has published a detailed report by the Inter-Departmental Group (IDG) on the internationalisation of INR. The report focuses on the potential for INR to become an international currency and provides recommendations to achieve this objective. This article provides an analysis of the report, including insights into India’s external sector progress, cross-country experiences, and the roadmap proposed by the IDG.
Analysis: The report highlights the significant progress made by India’s external sector in the past three decades, with increased trade and capital flows. India’s foreign exchange reserves, foreign direct investment, imports, and exports have all witnessed substantial growth. The international monetary and financial system has also evolved, with a decreasing share of USD in foreign exchange reserves and the emergence of various other currencies.
The IDG examined the prospects of internationalising INR and recommends a roadmap to accelerate its international presence. It discusses the concept of internationalisation, the experiences of other countries, and the factors influencing the pace of currency internationalisation. The report emphasizes that India’s economic growth, capital account convertibility, and global value chain integration provide a strong foundation for INR’s internationalisation.
Drawing from the Chinese experience, the report recognizes the role of bilateral currency swaps and local currency settlement frameworks in promoting the use of INR for settling foreign trade. The IDG suggests a broad approach that ensures a steady pace of internationalisation, taking into account the current level of capital account convertibility and recent initiatives such as the inclusion of INR as a settlement currency in multilateral mechanisms.
The recommendations provided by the IDG cover short-term, medium-term, and long-term actions. These include standardizing bilateral and multilateral trade arrangements, facilitating local currency settlement frameworks, strengthening financial markets, integrating payment systems, and recalibrating regulations for INR trade settlement.
RESERVE BANK OF INDIA
Report of the Inter-Departmental Group (IDG) on Internationalisation of INR
India’s external sector has shown remarkable progress in the last three decades after the economic liberalisation reforms were set in motion. Over the years, linkages of the Indian economy with the rest of the world in terms of trade and capital flows have increased. In the last decade, India’s foreign exchange reserves have grown from USD 290.5 billion in August 2012 to USD 560.4 billion in August 2022. During this decadal period, India’s Foreign Direct Investment (FDI) has increased from USD 46.6 billion to USD 84.8 billion; imports have increased from USD 489.3 billion to USD 612.6 billion, and exports have grown from USD 306.0 billion to USD 421.9 billion. Meanwhile, the international monetary and financial system has moved towards being multipolar as reflected in the steadily decreasing share of USD in foreign exchange reserves of countries, the increasing usage of other currencies in trade invoicing and settlement, and the emergence of various bilateral and regional economic cooperation agreements. This, along with recent geopolitical developments, has set the stage for the emergence of various other currencies, including the INR, as prospective currencies for use in international transactions.
2. Against this backdrop and in accordance with the Terms of Reference, the Inter-Departmental Group (IDG) examined the prospects of internationalisation of INR and has recommended a roadmap to achieve the same. The IDG deliberated on all the issues related to internationalisation of INR in a granular manner and recommends a set of time bound steps, which would accelerate the pace of internationalisation. The IDG notes that some of these steps have already been initiated and are currently work in progress. The Group would also like to emphasize that the timeframe for the implementation of the various recommendations has been suggested keeping in view the institutional capacity, preparedness and priority of macro-economic supporting conditions.
3. The first chapter of the report discusses the concept of internationalisation of a currency. The IDG views internationalisation as 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 size of an economy combined with the scale of external trade has a direct bearing on internationalisation of its currency. The IDG feels that INR has the potentialto 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. Further, India has made appreciable progress in terms of capital account convertibility, global value chain integration, setting up of GIFT city, etc. The higher usage of INR in invoicing and settlement of international trade, as well as in capital account transactions, will give INR a progressively international presence. Various aspects related to the process as well as underlying factors impacting the pace of internationalisation of a currency have also been elucidated in this chapter.
4. The second chapter covers cross-country experience in internationalisation of currencies. The IDG reviewed the rise in prominence of the Chinese Yuan as an international currency (CNY as part of the IMF, SDR basket, composition of CNY in the foreign exchange reserves of various nations, etc.), in spite of China retaining capital controls in many areas. China’s export-oriented manufacturing sector provides the basis for internationalisation of the Renminbi and this is supplemented by arrangements with partner countries in the
Disclaimer: This report and its recommendations reflect the views of the IDG and do not in any way reflect the official position of the Reserve Bank of India.
form of bilateral currency swaps. Drawing on the Chinese experience, the IDG notes the important role that bilateral currency swaps can play in promoting use of INR for settling foreign trade thereby achieving internationalisation of INR. It is also observed that Local Currency Settlement (LCS) frameworks also facilitate wider use of local currencies in current and capital account transactions thereby facilitating the ease of doing business and reducing dependence on hard currencies.
5. The third chapter discusses the broad approach adopted by the IDG for internationalisation of the INR, which is to minimize negative disruptions and envisages continuous change in the architecture of Indian financial system by generating natural stimulants for spurring international demand of INR for cross border transactions. The current level of Capital Account Convertibility (CAC) gives enough room for initiating steps towards internationalisation. The recent initiative taken under the Asian Clearing Union arrangement to introduce INR as a settlement currency is also a timely step to encourage use of INR for multilateral settlementof international trade transactions. While we have had INR arrangements with Bhutan and Nepal for a long time, the recent decision by Sri Lanka to formally include INR as a designated foreign currency augurs well for incremental internationalisation of INR. Overall, the IDG’s approach was to identify the existing level of internationalisation of INR and suggest a roadmap towards internationalisation at a steady pace. The IDG notes that several measures have been taken to increase non-residents’ participation in the domestic economy, integrate onshore and offshore financial markets and foster greater Indian participation in global trade and finance, and feels that it is essential to continue on this path. Further, robust financial markets would facilitate successful internationalisation of INR. This would also require use of macro-economic prudential tools as a part of a welldefined risk management framework. The IDG opines that CAC is not a pre-condition for internationalisation of INR, or vice-versa.
6. The internationalisation of a currency is also closely interlinked with the nation’s economic progress especially its prominence in global trade. The measures for promoting internationalisation of INR would involve steps towards parallelly liberalising the capital account, promoting international usage of INR, and strengthening financial markets. The fourth chapter discusses all these issues in detail. The IDG is of the view that internationalisation is a process rather than an event, with continuous efforts to build upon all the initiatives that have been taken in the past.
7. The IDG’s recommendations are covered in chapter five of the report. The recommendations have been divided as per the expected time required for implementation. The timeframe of these recommendations has been determined based on the institutional capacity, macroeconomic priority and suitability of accompanying prerequisites.
8. Over the short term, the IDG recommends the following:
- 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.
- Making efforts to enable INR as an additional settlement currency in existing multilateral mechanisms such as ACU.
- Facilitating LCS framework for bilateral transactions in local currencies and operationalising bilateral swap arrangements with the counterpart countries in local currencies.
- Encouraging opening of INR accounts for non-residents (other than nostro accounts of overseas banks) both in India and outside India.
- Integrating Indian payment systems with other countries for cross-border transactions.
- Strengthening financial markets by fostering a global 24×5 INR market and promoting India as the hub for INR transactions and price discovery.
- Facilitating launch of BIS Investment Pools (BISIP) in INR and inclusion of G-Secs in global bond indices.
- Recalibrating the FPI regime and rationalizing/harmonizing the extant Know Your Customer (KYC) guidelines.
- Providing equitable incentives to exporters for INR trade settlement.
9. Over the medium-term horizon, the IDG has recommended:
- A review of taxes on Masala bonds.
- International use of Real Time Gross Settlement (RTGS) for cross border trade transactions and inclusion of INR as a direct settlement currency in the Continuous Linked Settlement (CLS) system.
- Examination of taxation issues in financial markets to harmonise tax regimes of India and other financial centres.
- Allowing banking services in INR outside India through off-shore branches of Indian banks.
10. Finally, the IDG feels that over the long term, 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”. Thus, the IDG recommends that in the long run, efforts should be made for inclusion of INR in IMF’s SDR basket.
Source- RBI Report of the Inter-Departmental Group (IDG) on Internationalisation of INR
