The Reserve Bank of India (RBI) has enabled exports and imports to be denominated in rupees. This will internationalize the rupees.
Internationalization of rupee: what is it?
Internationalization refers to the phenomenon in which the national currency can trade beyond its borders. It can be actively used in the invoicing of trade and financial transactions, commodities, and foreign exchange reserves.
One of the most important drivers of internationalization of a currency is the country’s share in global merchandise and commercial service trade.
India’s percentage share in the global trade is still on the lower side and it limits the pricing ability of domestic business in India rupee.
Most importantly, it will reduce India’s dependency on dollar.
How it will impact our economy?
The move to allow rupee settlements for international trade would help India promote exports and facilitate trade with countries under sanction. The rupee can now be used to pay for a Oil rather than the dollar. India has been lifting imports of oil to take advantage of a dip in prices after the US, Europe, Australia and Japan piled economic sanctions on Russia. Since the arrangement appears to have been made to enable rupee-ruble trade, a cheaper Russian crude oil can help India, which has seen inflation surge past the central bank’s target as oil rallied to nearly $130 a barrel.
Its benefits:
Making the rupee an international currency can lower the transaction costs of cross-border trade and investment operations, as it would mitigate exchange change risk. In other words, it would reduce foreign currency risks for traders. According to economists, it will also save foreign exchange for transactions for Indian residents; reduce foreign exchange exposure for India inc and lower dependence on foreign exchange reserves for balance of payment stability, etc.
How does the new mechanism work?
Under this mechanism, exporters and importers can use a special vostro account linked to the correspondent bank of the partner country for the receipts and payments denominated in rupees.
A Vostro account is one opened by a bank in its home country on behalf of a foreign bank. The funds in the rupee account can be used by the export partner for trading with anyone who accepts rupees.