India has to take risks for rupee internationalisation if it has to progress to be an economic superpower, says RBI Deputy Governor T Rabi Sankar

A central bank deputy governor today rooted for internationalisation of rupee and even take up unavoidable risks if India is to progress to be an economic superpower.

While listing the advantages of internationalisation of the rupee, Reserve Bank of India Deputy Governor T Rabi Sankar said it reduces the need for holding foreign exchange reserves; something that has in recent months been a worry for stakeholders as the RBI has burned $114 billion of its reserves since September last year in a desperate attempt to halt rupee's record plunge.

"While reserves help manage exchange rate volatility and project external stability, they impose a cost on the economy...Assuming an interest differential of 2%, on a Reserve base of say USD 600 billion, the cost of reserves would work out to USD 12 billion, annually. This cost represents a transfer of income from India to AEs. Reducing the requirement of reserves would save some of this this loss of income," he said.


Sankar was speaking at the Annual Day event of the Foreign Exchange Dealers Association of India (FEDAI) in Mumbai.

India's largest lender State Bank of India had said in July that the RBI should make a conscious effort to internationalise the rupee given that the Russia-Ukraine war and the disruptions to payments caused by it is a good opportunity to insist on export settlement in rupee.

The deputy governor also said internationalisation of the rupee reduces dependence on foreign currency and that makes India less vulnerable to external shocks. Use of Rupee in cross-border transactions mitigates currency risk for Indian business.

Also, as the use of Rupee becomes significant, the bargaining power of Indian business would improve adding weight to the Indian economy, enhancing India’s global stature and respect.

"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.

However, internationalisation of the local currency is not devoid of "real risks" as well.

"Macroeconomic policy would need to measure up to such risks. Internationalisation would make domestic monetary policy more challenging but the alternative of compromising on growth by playing it safe is clearly not an optimal choice," Sankar said.

What India needs to do is 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, he added.

Sankar flagged India is a capital deficient country, and therefore it needs foreign capital to fund its growth. If a substantial portion of its trade is in Rupee, non-residents would hold Rupee balances in India which would be used to acquire Indian assets.

However, large holdings of such financial assets could heighten vulnerability to external shocks, managing which would necessitate more effective policy tools.

Also, non-resident holdings of Rupees could exacerbate pass-through of external stimulus to domestic financial markets, increasing volatility, the deputy governor said.