The deputy governor of the Reserve Bank of India recently stated that as India moves closer to internationalizing the rupee, it must prepare for the inevitable volatility that would emerge in the foreign exchange market.
An international currency is one that non-residents can use freely to settle cross-border transactions. In the case of the rupee, this will be accomplished by encouraging the currency to allow unlimited import and export.
But that will make the rupee more vulnerable to events occurring around the world, which would boost outflows and instability.
According to M. Rajeshwar Rao, former deputy governor of the RBI, the risks associated with internationalization and a freer capital account are now widely acknowledged, even though they have their own benefits.
Rao’s remarks, which were a part of his highlighted talk at a conference held on Sunday by the “Foreign Exchange Dealers’ Association of India (FEDAI),” did not go into further detail regarding how to control the volatility. The speech was made public on Thursday by the RBI, which posted a copy online.
The promotion of trade in rupees has been a goal for India in recent years. To encourage exports and ease imports, the RBI unveiled a brand-new system for rupee-based international trade settlement in July last year.
According to Rao, the rupee trading arrangements the RBI was putting in place attracted a fair amount of interest. Also, he continued, domestic exporters and importers won’t need to hedge if the central bank’s efforts to implement rupee-invoicing are successful.
Rao pointed out that there was potential, even though he cautioned that more interconnected markets would create more difficulties.
According to him, new horizons will also open up as Indian banks increase their presence in international markets, non-residents participate more in domestic markets, and technological advancements continue to modify how markets operate.
In such a situation, the RBI is nevertheless dedicated to making steady progress in accordance with the shifting macroeconomic landscape on a national and international level.