Context:

Recently, the Reserve Bank of India (RBI) allowed the opening of Rupee accounts abroad to boost the Internationalisation of India rupee.

Key Highlights

• RBI's Strategic Plan for Internationalising the Rupee: The RBI in its annual report highlighted the efforts towards rationalisation of regulations for promoting the internationalisation of the Indian currency to enable the settlement of bilateral trade in local currencies.
• External commercial borrowing: The RBI's strategic plan includes the liberalisation of the external commercial borrowing (ECB) framework.
  External Commercial Borrowing (ECB) refers to Indian entities securing loans from foreign lenders in foreign currency. 

Opening of Rupee Accounts Outside India: 

• As part of the 2024-25 strategic Plan for internationalizing the domestic currency, the RBI will permit persons resident outside India (PROIs) to open Rupee accounts outside the country. 
• The report also mentions facilitating Rupee lending by Indian banks to PROIs and enabling foreign direct investment (FDI) and portfolio investment through special accounts such as the special non-resident rupee (SNRR) account and the special rupee vostro account (SRVA).

Key Differences:

• Account Holder: SNRR account is for individual PROIs, while SRVA is for designated banks of partner countries.
• Objective: SNRR caters to a broader range of Rupee transactions, while SRVA focuses on trade settlements.

Internationalization of the Indian Currency

It refers to the process of increasing Rupee use in international transactions for international trade settlements (import & export payments) and foreign investments etc.

Advantages of Internationalization:

• It reduces dependence on foreign currencies (like $) for trade, thus minimising the currency risk for Indian businesses.
• It lowers transaction costs for Indian businesses, thus enabling better growth, and improving the chances for Indian businesses to grow globally.
• It enhances global acceptance of Rupee, and strengthens India's economic position.

Challenges:

• Opening up the currency to international markets can increase volatility in its exchange rate, especially in the initial stages.
• The rupee’s internationalisation may lead to increased demand for the Indian currency in global markets that might strengthen the Rupee against other currencies. This will negatively impact the export competitiveness of Indian products globally. 
• Currently, the Rupee is not fully convertible with restrictions particularly on capital account transactions. This limits its use in international trade and finance.

Recommendations

Short-Term:

• Adopt a standardized approach for evaluating bilateral and multilateral trade proposals involving invoicing, settlement, and payment in the rupee and local currencies.
• Encourage opening rupee accounts for non-residents in and outside India.

Medium-Term: 

• Promote international use of Real Time Gross Settlement (RTGS) for cross-border trade.
• Include Indian Government Bonds in global bond indices. 

Long-Term: 

• Work towards including the rupee in the IMF’s Special Drawing Rights (SDR) basket.