Forwarded from ABC ABC
RBI Grade B 2023 Phase 1 GA.pdf
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Last Minute Revision, 50 Important One Liners! 👍
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Yesterday, the RBI released a report on internationalisation of the rupee. Below are the key takeaways from the report (1/2)
• Internationalisation of INR is a process rather than an event. For wider international acceptance of a currency, the size of domestic economy and centrality to global trade matter
• Benefits of internationalization include lower exchange rate risk, new profit opportunities to financial institutions, reduced cost and higher availability of capital, ability to fund budget deficit by issuing domestic currency debt in international markets, ability to finance CAD without drawing down official reserves, reduced need to maintain large foreign exchange reserves and high seigniorage benefits
• Costs of internationalization include potential increase in exchange rate volatility, the obligation to supply domestic currency to meet global demand may come in conflict with domestic monetary policies, and possible accentuation of external shocks
• On the net, benefits outweigh costs
• Currencies with higher interest rates might internationalise faster than currencies with relatively lower interest rates
• Capital Account Convertibility (CAC) is a desirable but not a necessary pre-condition for internationalisation of a currency (as seen in the case of the Renminbi). While the two (CAC and internationalisation) are closely intertwined concurrent processes, each feeding into the other, internationalisation of currency can be achieved to a substantial extent, independent of full capital account convertibility
• However, central banks needs to be ready to provide liquidity (for example through bilateral swap arrangements) and allow conversion into other currencies
• India can leverage advanced payment systems like RTGS, NEFT and UPI for achieving greater internationalisation of the INR at a faster pace
• The government can examine the scope of including INR in the Continuous Linked Settlement (CLS) system, which currently settles trades in 18 currencies. It would ultimately enable the development of an Indian Clearing System (ICS) on similar lines, albeit on a smaller scale
• Procedural and documentation roadblocks faced by various investors, like foreign portfolio investors, need to be reviewed
• To enable price discovery of the INR exchange rate vis-à-vis domestic currencies of trading partners, access to the onshore financial markets should be facilitated
• With deep and liquid financial markets and strong macroeconomic indicators, INR would be used by other economies for pegging their currencies, which will fulfil the requirement of INR being used as a “vehicle currency” by other jurisdictions. For attaining the objective of INR as a “Vehicle Currency”, the Bank may target its inclusion in the SDR basket
• GIFT IFSC has the potential to develop as a competitor to international financial centres for Rupee products and more specifically Rupee derivatives, since Rupee derivatives are among the most traded contracts globally. (Credir:Anagha Deodhar)
• Internationalisation of INR is a process rather than an event. For wider international acceptance of a currency, the size of domestic economy and centrality to global trade matter
• Benefits of internationalization include lower exchange rate risk, new profit opportunities to financial institutions, reduced cost and higher availability of capital, ability to fund budget deficit by issuing domestic currency debt in international markets, ability to finance CAD without drawing down official reserves, reduced need to maintain large foreign exchange reserves and high seigniorage benefits
• Costs of internationalization include potential increase in exchange rate volatility, the obligation to supply domestic currency to meet global demand may come in conflict with domestic monetary policies, and possible accentuation of external shocks
• On the net, benefits outweigh costs
• Currencies with higher interest rates might internationalise faster than currencies with relatively lower interest rates
• Capital Account Convertibility (CAC) is a desirable but not a necessary pre-condition for internationalisation of a currency (as seen in the case of the Renminbi). While the two (CAC and internationalisation) are closely intertwined concurrent processes, each feeding into the other, internationalisation of currency can be achieved to a substantial extent, independent of full capital account convertibility
• However, central banks needs to be ready to provide liquidity (for example through bilateral swap arrangements) and allow conversion into other currencies
• India can leverage advanced payment systems like RTGS, NEFT and UPI for achieving greater internationalisation of the INR at a faster pace
• The government can examine the scope of including INR in the Continuous Linked Settlement (CLS) system, which currently settles trades in 18 currencies. It would ultimately enable the development of an Indian Clearing System (ICS) on similar lines, albeit on a smaller scale
• Procedural and documentation roadblocks faced by various investors, like foreign portfolio investors, need to be reviewed
• To enable price discovery of the INR exchange rate vis-à-vis domestic currencies of trading partners, access to the onshore financial markets should be facilitated
• With deep and liquid financial markets and strong macroeconomic indicators, INR would be used by other economies for pegging their currencies, which will fulfil the requirement of INR being used as a “vehicle currency” by other jurisdictions. For attaining the objective of INR as a “Vehicle Currency”, the Bank may target its inclusion in the SDR basket
• GIFT IFSC has the potential to develop as a competitor to international financial centres for Rupee products and more specifically Rupee derivatives, since Rupee derivatives are among the most traded contracts globally. (Credir:Anagha Deodhar)
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