Rupee Trade To Help Cut Transaction Cost

Relevance: GS3 - Indian Economy and Related Issues

(Source: The Hindu, 04/14/2023)

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Why in the news?

• The Ministry of Commerce and Industry had recently released the Foreign Trade Policy 2023, which emphasizes the internationalization of rupee-based commerce.
• The ministry stated that international trading in domestic currency will assist cut transaction costs for the industry, and various nations are in discussions with the RBI.

Overseas trade in Rupee

• Last year, the RBI and Finance Ministry requested bank executives and trade association officials to encourage rupee-based export and import transactions.
• They want Indian banks to connect with their overseas counterparts to create special rupee vostro accounts to promote cross-border transactions in Indian currency rather than the widely used US dollar.
• Today, various countries are realizing that there is a need for currency shift in commerce, which requires a conversion fee, which raises transaction costs.
• As of today, many banks, including HDFC Bank and UCO Bank, have launched special vostro accounts to promote rupee transactions internationally.

India's New Foreign Trade Policy 2023

• The FTP 2023 will accelerate the growth of e-commerce exports, which are expected to reach USD 200-300 billion by 2023.
• The Foreign Trade Strategy 2023-28 contains an amnesty scheme for one-time resolution of export requirement defaults.
• Under the new foreign trade strategy, the dairy industry will be spared from maintaining average export obligations, and a special advance authorisation procedure has been extended to textiles and clothes.
• Towns of Export Excellence: Faridabad, Moradabad, Mirzapur, and Varanasi have been identified as new Towns of Export Excellence (TEE) under the new FTP in addition to 39 existing towns.
• E-Commerce Exports: The value of exports via courier services has been enhanced to Rs 10 lakh from Rs 5 lakh per cargo under the new regulations.
• Total exports for the fiscal year 2023 are expected to exceed USD 760 billion, up from USD 676 billion in 2021-2022.
• This policy is intended to address challenges and transform India's international trade. It will also strive to move from incentives to remission.
• It prioritizes export promotion through collaborations with exporters, states, districts, and Indian Missions.
• It will promote greater ease of doing business and will concentrate on expanding sectors such as e-commerce and export hubs.

What is the Internationalisation of Rupee?

• The internationalization of the rupee is the process of expanding the usage of the local currency in cross-border transactions.
• It entails pushing the rupee for import and export trade, then other current account activities, and finally its usage in capital account transactions.
• The rupee is completely convertible in current account but only partially convertible in capital account.
• Current and capital accounts are the two components of the balance of payments. While the current account is primarily concerned with the import and export of goods and services, the capital account is concerned with the cross-border movement of money through investments and loans.

Advantages of Internationalization of Rupee

• Increased worldwide acceptance: Internationalization of the rupee can lead to more international transactions being undertaken in the rupee, reducing demand for other currencies and lowering exchange rate risks.
• Reduced transaction costs: The internationalization of the rupee can decrease transaction costs for Indian firms by eliminating the need to pay exchange rate fees when changing rupees into foreign currencies for overseas transactions.
• Increased trade and investment: The internationalization of the rupee can increase trade and investment by making it easier for foreign enterprises to invest in India and for Indian businesses to invest abroad.
• Enhanced competitiveness: A more freely traded rupee can boost India's competitiveness in global markets by allowing the currency to reflect the country's economic fundamentals and eliminating the need for the Reserve Bank of India to interfere in currency markets.
• Diversification of reserves: Internationalization of the rupee can diversify India's foreign exchange reserves away from a concentration on US dollars, decreasing the risks associated with holding a single currency.

Challenges of Internationalisation of Rupee

• Exchange rate volatility is the fundamental problem of internationalising the rupee since it may generate hazards for firms and investors who operate in different currencies, leading to uncertainty and greater transaction costs.
• Integration with global financial markets: It necessitates integration with global financial markets, which can present obstacles in terms of regulatory compliance, market infrastructure, and investor protection.
• Limited liquidity: Because the rupee is not yet a widely traded currency, there is limited liquidity in global markets, making it harder for investors to acquire and sell rupee-denominated assets, which might limit the currency's appeal.
• Undeveloped financial markets: India's financial markets are still relatively undeveloped when compared to other major economies, which might limit the range of products and services available to overseas investors.
• Regulatory challenges: It necessitates a supportive regulatory framework that balances the demand for openness with the need for financial stability and regulatory oversight, which is difficult to achieve, especially given the intricacies of global financial markets.

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FAQs

MCQ

Question: With reference to Balance of Payments, which of the following constitutes/constitute the Current Account? (UPSC 2014)

1. Balance of trade
2. Foreign assets
3. Balance of invisibles
4. Special Drawing Rights

Select the correct answer using the code given below:

(a) 1 only

(b) 2 and 3

(c) 1 and 3

(d) 1, 2 and 4