Theme:

  • Sanctions on Russia for its invasion of Ukraine may dilute the dominance of the US dollar in the global financial system. So, this presents an opportunity to push for the internationalization of the Rupee.

What is Currency Internationalization:

  • Currency internationalization is the extensive use of the currency beyond its origin country. For example, the US dollar, an international currency is used worldwide and not just in the US. Moreover, international currencies are held by other countries as foreign exchange reserves.
  • Major international currencies are the US dollar, Euro, Yen, and Pound Sterling.
  • Some factors such as the size of the international transactions in that currency, financial stability and political stability of the country etc., determine whether the currency can become an international currency or not.

The possibility of the internationalization of the Rupee:

  • Sanctions on Russia for its invasion of Ukraine resulted in the possibility of trade agreements in currencies other than the US dollar. This can negatively affect the share of the US dollar in international transactions, which can dilute the dominance of the US dollar in the global financial system. So, making trade agreements with other countries in Rupees can increase the share of the Rupee in international transactions and hence can pave a path to the internationalization of the Rupee.
  • India is a democratic country. The political stability of India can be very helpful in gaining the confidence of foreign investors and thereby can push for the internationalization of the Rupee.
  • The share of the Rupee in international transactions is very low. So, it may take a long time to make the Rupee as an international currency.
  • Non-Performing Assets (NPA) can overwhelm the banking system and hence can affect the financial stability. So, India have to solve the NPAs issue to improve financial stability, which is a prerequisite for the internationalization of the currency.
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Conclusion:

Sanctions on Russia for its invasion of Ukraine may dilute the dominance of the US dollar in the global financial system. So, this presents an opportunity to push for the internationalization of the Rupee. The political stability of India is also a plus point.

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1 Comment

  • Sathish Karunakaran, Apr 18, 2022 @ 12:51 am Reply

    More income tax exemptions should be extended for exports in rupee denominated trades to encourage traders to invoice in rupee.

    Controls and restrictions on transfers in capital account should be relaxed.

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