The Reserve Bank of India (RBI) has said in its report that internationalization of the rupee is inevitable but it will complicate the formation of monetary policy. This report is based on currency on finance.
The internationalization of the rupee means that the currency can be used independently by both resident and non-resident and can be used as a reserve currency for global trades.
The report states that the elimination of exchange rate risk as a result of internationalization of the local currency may reduce the cost of transaction and investment operations in cross-border trade, but it may change exchange rate stability to a transient and domestic approach to monetary policy Makes it challenging. This requires large and intensive domestic financial markets capable of withstanding external shocks effectively.
“Internationalization may possibly limit the central bank’s ability to control the domestic rupee supply and affect interest rates according to domestic macroeconomic conditions,” the report said. It states that apart from intensive and complex financial markets, the most important precondition for internationalization of a currency is price stability.
Inflation higher than the world average reduces the currency’s ability to be used as an international medium of exchange and become a repository of value and restricts the role of such an economy in global value chains.
Conversely, a stable price gives international investors confidence in the domestic currency.
It states that in this context, the primary thrust of flexible inflation, keeping the framework on price stability in mind, is quite helpful for further liberalizing the capital account and internationalization of the rupee.
The report suggested that the Reserve Bank should carefully monitor the regulatory rates as an important information variable to formulate monetary policy as inflation may change from 10 to 13 per cent of the exchange rate change from now on.
Interestingly, the report also mentioned the need to use the Permanent Deposit Facility (SDF) which soaks up liquidity without offering a mortgage.
SDF has been a long-awaited market for liquidity absorbing equipment. Reserve Bank Governor Shaktikanta Das has also indicated earlier that this is available as an option with the Reserve Bank if needed.