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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Why GIFT City could be the next big thing?
To understand this better, let’s understand how Bandra-Kurla Complex in Bombay shaped up.
In 1977, the Maharashtra government decided that it wanted to decongest Nariman Point-Cuffe Parade area of South Bombay. Why?
It got just too crowded with offices and government sitting at the bottom end of the Bombay Peninsula.
Hence, the 370 hectares of marshy land along the Mithi river was selected.
It was equidistant from Kurla and Bandra sub-urban railway lines (3-4 KMs) and at the center point of Bombay.
But, initially it did not offer last-mile connectivity like offices in South Bombay did. Hence, people/offices were hesitant to shift to BKC. It took a lot of convincing (read: Diamond Bourses) and liberalization (read: all wanted offices in Bombay) for offices to open up in BKC.
Today, it is the most prominent business space in India. Similar was the case with Gurgaon in Delhi, where such efforts paid off in creating a parallel CBD to Connaught Place.
Still, the transportation system is poor to BKC (should improve when the metro and high-speed rail comes by).
Unlike previously, the government currently invests heavily on infrastructure. Take GIFT City.
Future development areas are already pre-notified (unlike in BKC, where people are now searching for Grade A/B offices in Parel/Thane). In addition, metro connectivity from Gandhinagar-Ahmedabad twin-cities is in works.
Government’s push to bring investments in GIFT City (NSE IE, Google) coupled with proposed liberal regulations for NRI investments in GIFT city and good infra (high-speed rail + metro + access airport) further puts it in a better position.
When liberalization came to #India in 1991, money was to be tapped available in Bombay. Now if regulations favor NRIs/foreign investors/foreign universities, GIFT city is expected to benefit similar to how BKC benefitted.
And of-course, a less congested city to live in for the working population. Pune and Bangalore are examples of how mobile talent can give a new life to a traditional city.
Government push + right infra = Helps in shifting the business districts much faster than the normal course.
It took 30 years for BKC to become what it is. Might just take lesser for GIFT City.
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Disc. Views are solely my own & not of my employer. Shashank Kamath GM Bajaj Finserv.
To understand this better, let’s understand how Bandra-Kurla Complex in Bombay shaped up.
In 1977, the Maharashtra government decided that it wanted to decongest Nariman Point-Cuffe Parade area of South Bombay. Why?
It got just too crowded with offices and government sitting at the bottom end of the Bombay Peninsula.
Hence, the 370 hectares of marshy land along the Mithi river was selected.
It was equidistant from Kurla and Bandra sub-urban railway lines (3-4 KMs) and at the center point of Bombay.
But, initially it did not offer last-mile connectivity like offices in South Bombay did. Hence, people/offices were hesitant to shift to BKC. It took a lot of convincing (read: Diamond Bourses) and liberalization (read: all wanted offices in Bombay) for offices to open up in BKC.
Today, it is the most prominent business space in India. Similar was the case with Gurgaon in Delhi, where such efforts paid off in creating a parallel CBD to Connaught Place.
Still, the transportation system is poor to BKC (should improve when the metro and high-speed rail comes by).
Unlike previously, the government currently invests heavily on infrastructure. Take GIFT City.
Future development areas are already pre-notified (unlike in BKC, where people are now searching for Grade A/B offices in Parel/Thane). In addition, metro connectivity from Gandhinagar-Ahmedabad twin-cities is in works.
Government’s push to bring investments in GIFT City (NSE IE, Google) coupled with proposed liberal regulations for NRI investments in GIFT city and good infra (high-speed rail + metro + access airport) further puts it in a better position.
When liberalization came to #India in 1991, money was to be tapped available in Bombay. Now if regulations favor NRIs/foreign investors/foreign universities, GIFT city is expected to benefit similar to how BKC benefitted.
And of-course, a less congested city to live in for the working population. Pune and Bangalore are examples of how mobile talent can give a new life to a traditional city.
Government push + right infra = Helps in shifting the business districts much faster than the normal course.
It took 30 years for BKC to become what it is. Might just take lesser for GIFT City.
-
Disc. Views are solely my own & not of my employer. Shashank Kamath GM Bajaj Finserv.
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RBI Induction Training Days, pic taken at Vrundavan Garden, Mysuru❤️And I am wearing the Same T Shirt in the Video🙏🙏
On T-shirt Pocket, it’s written as RBSC in white letters, it’s Reserve Bank Staff College.
On T-shirt Pocket, it’s written as RBSC in white letters, it’s Reserve Bank Staff College.
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If you have actually tracked your day to day expenses then you will realise that ground level inflation is appx 20-30% after Covid and RBI says it’s below 6%🤦🏻♂️
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