India's Deputy Governor T Rabi Sankar has emphasized the importance of the rupee's internationalization in reducing India's external risks and supporting its ambition to become a developed economy. According to Sankar, the internationalization of the rupee has already commenced, with a growing number of exporters opting to invoice in the local currency.
Speaking at the Business Standard BFSI Insight Summit, Sankar clarified that the goal of internationalizing the rupee is not to replace the dollar, which he deemed unrealistic, but rather to mitigate risks for Indian businesses by facilitating more transactions in rupees. This move is expected to reduce currency exposure for exporters and foster a more balanced global financial system where multiple currencies play significant roles. As India's economy continues to expand, it is crucial for the rupee to gain wider acceptance in cross-border trade, and the current initiatives are aimed at creating a conducive environment for this transition.
Sankar highlighted that using the rupee in cross-border transactions reduces dependence on foreign currencies, making India less susceptible to external shocks. He also noted that the internationalization of the rupee could improve the bargaining power of Indian businesses, enhance India's global stature, and add weight to the Indian economy.
However, Sankar acknowledged that the internationalization of the rupee is not without risks. He pointed out that as a capital-deficient country, India relies on foreign capital to fund its growth. If a substantial portion of trade is conducted in rupees, non-residents would hold rupee balances in India, which could be used to acquire Indian assets. Large holdings of such financial assets could increase vulnerability to external shocks, necessitating more effective policy tools. Additionally, non-resident holdings of rupees could amplify the impact of external stimulus on domestic financial markets, leading to increased volatility. He stated that these risks are unavoidable if India aspires to become an economic superpower.
Sankar also addressed the challenges posed by stablecoins, highlighting the risk of currency substitution and the potential loss of monetary sovereignty, particularly for emerging markets like India. He argued that a Central Bank Digital Currency (CBDC) could meet all legitimate use cases of stablecoins without these associated risks.
Furthermore, the Reserve Bank of India (RBI) is actively adapting its regulations to support the internationalization of the rupee. Recent measures include new norms for external commercial borrowing (ECB) and foreign exchange liberalization, which remove cost caps, broaden the range of eligible borrowers and lenders, expand end-uses, and increase borrowing limits. The RBI has also introduced a Unique Transaction Identifier for over-the-counter derivative trades related to rupee interest rates and foreign exchange currencies, enhancing regulatory oversight of transaction trends and market health.
