Internationalisation of rupee can cause excess exchange rate volatility, says RBI group

The Inter Departmental Group of the Reserve Bank of India has recommended a roadmap to achieve the internationalization of the rupee. File.
| Photo Credit: Reuters

As the Government of India presses ahead with internationalisation of the Indian Rupee (INR), an Inter Departmental Group (IDG) of the Reserve Bank of India (RBI) in a report has said that internationalization may result in potential increased volatility in the rupee’s exchange rate in the initial stages.

“This would further have monetary implications as the obligation of a country to supply its currency to meet the global demand may come in conflict with its domestic monetary policies, popularly known as the Triffin dilemma,” the IDG said.

“Also, the internationalisation of a currency may accentuate an external shock, given the open channel of the flow of funds into and out of the country and from one currency to another,” the group added.

Stating that costs also emanate from the additional demand for money and also an increase in the volatility of the demand, it said with the advances in statistical reporting, most central banks can separate foreign demand for money, but with regard to some components, such as cash, uncertainty remains.

“International currency use can also have an impact on financing conditions in a way that is, at times, undesired,” the IDG said.

However the group felt overall that the benefits of internationalisation in terms of limited exchange rate risk, lower cost of capital due to better access to international financial markets, high seigniorage benefits and reduced requirement of foreign exchange reserves far outweigh the above concerns.

“Further, as the internationalization of a currency is a long-drawn process involving continuous change and incremental progress, it would enable timely redressal of the associated concerns and challenges as we move forward,” it said.

In accordance with the Terms of Reference, the IDG has recommended a roadmap to achieve the internationalization of the rupee.

“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 group said.

“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,” it.

It has recommended for 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.

It said efforts must be made to enable INR as an additional settlement currency in existing multilateral mechanisms such as ACU.

The IDG has also made several other recommendations. The report of the IDG has been placed by the RBI on its website.

“The 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. The recommendations of the report will be examined for implementation,” The RBI said.

The objective of the IDG was to review the extant position of INR as an international currency and to frame a road map for the internationalisation of INR.