RBI Deputy Gov. Bats for Rupee Globalization

Reserve Bank of India Deputy Governor T Rabi Shankar has batted for internationalization of the Rupee and said the country should take up some unpleasant tasks to make this happen. He believes that unless the Rupee becomes a globally traded currency, India cannot progress towards its goal of becoming an economic superpower. 

The official made these comments while participating in the Annual Day celebrations of the Foreign Exchange Dealers Association (FEDAI) at Mumbai on Friday. Rabi Sankar said making the Rupee globally tradable reduces India’s need for holding foreign exchange reserves. RBI has burnt $114 billion of its reserves since September to stem the Rupee’s plunge. 

In fact, RBI appears to be echoing the sentiments of India’s largest bank, SBI, which made a strong pitch in July for allowing market forces to determine the value of the Rupee. The comments came following the Ukraine war and the payment disruptions it caused. SBI claimed that the situation presented a good opportunity to claim export settlements in rupee. 

Reduced dependence on foreign currency

On his part, Rabi Sankar said internationalization also reduces dependence on foreign currency, leaving India less vulnerable to external shocks. Use of the rupee in cross-border transactions mitigates currency risks for Indian exporters, who can also bargain better with their international customers. Of course, one wonders how the IT industry would react to this shift, given that their profits are driven by cost arbitrage based on dollar payments.  

“An international currency is one that is freely available to nonresidents, essentially to settle cross-border transactions. It is an expression of external credibility in the currency as well as in the economy. All truly international currencies belong to large, advanced economies. Their use for international transactions confers substantial economic privileges to the host countries,” he said but warned that such moves also brings their own set of risks. 

Domestic policy tools would be critical

Macroeconomic policy would need to measure up to such risks. Internationalization would make domestic monetary policy more challenging but the alternative of compromising on growth by playing it safe is clearly not an optimal choice, Rabi Sankar said while noting that India needs to calibrate its moves to the evolving size of the domestic economy, particularly the size of the external sector and to its appetite for risk in framing policy for external trade and capital flows. 

The RBI deputy governor also flagged the fact that India continued to be a capital deficient economy, which requires foreign fund infusion to sustain growth. If a large chunk of all its trade converts to rupee-denominated ones, non-resident Indians would hold rupee balances in India that could then be used to acquire Indian assets. 

However, such large holdings could potentially enhance vulnerability to external shocks, meaning that policy tools would continue to play a critical role in managing them. He also cautioned that non-resident holdings of the Rupee could exacerbate pass-through of external stimulus to domestic financial markets, increasing volatility.