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RBI allows NRI to open rupee accounts abroad with authorized banks

Explained | Economics | Mains Paper 3: Indian Economy
Note4Students

From UPSC perspective, the following things are important :

Mains level: Monopoly of Dollars,Internationalisation of INR;

Why in the News?

The Reserve Bank of India (RBI), along with the Central government, has reviewed the rules under the Foreign Exchange Management Act 1999 (FEMA) to make it easier to carry out cross-border transactions in Indian rupees (INR) according to a statement by the RBI.

What are the recent changes made in FEMA regulations by RBI?

  • Opening Rupee Accounts for Non-Residents: Overseas branches of authorized dealer (AD) banks can now open rupee accounts for non-residents, enabling them to conduct current and capital account transactions with Indian residents.
  • Settlement of Transactions: Non-residents can use their balances in repatriable rupee accounts, including Special Non-Resident Rupee Accounts (SNRAs) and Special Rupee Vostro Accounts (SRVAs), to settle transactions with other non-residents abroad.
  • Investment Opportunities: Balances in these accounts can be utilized for foreign investments, including Foreign Direct Investment (FDI) in non-debt instruments, thereby promoting rupee-based investments.
  • Flexibility for Exporters: Indian exporters are now permitted to open foreign currency accounts overseas to receive export proceeds and use these funds for import payments, enhancing operational flexibility.
  • Support for Local Currency Transactions: The new guidelines support cross-border transactions in local currencies, reducing reliance on dominant foreign currencies like the US Dollar

What is internationalisation of Rupee?

  • The internationalization of the rupee refers to the process of increasing the use and acceptance of the Indian rupee (INR) in global trade, investment, and cross-border transactions. This initiative aims to promote the rupee as a viable alternative to dominant currencies like the US dollar in international markets.

What are the key features of the internationalisation of Rupee?

  • Cross-Border Transactions: The primary goal is to facilitate more cross-border transactions in rupees, allowing businesses and individuals to conduct trade and investments without relying on foreign currencies.
  • Current and Capital Account Transactions: Initially focused on promoting the rupee for import and export trade, the process will extend to other current account transactions and eventually capital account transactions, enabling investments in rupee-denominated assets.
  • Full Convertibility: Achieving full capital account convertibility is essential for internationalization, meaning there would be no restrictions on converting rupees into foreign currency or vice versa for investments and loans.
  • Strengthening Economic Sovereignty: Reducing reliance on foreign currencies enhances India’s economic sovereignty and minimizes exposure to currency fluctuations, thereby stabilizing trade relations.
  • Enhancing Global Trade: By allowing direct transactions in rupees, internationalization can simplify cross-border trade processes, eliminate currency conversion needs, and reduce transaction costs.

 

What are the significance of Internationalisation of Rupee? 

  • Reducing Exchange Rate Risks: By promoting INR usage in international trade, India can mitigate exchange rate risks associated with reliance on major currencies like the USD.
  • Enhancing Trade Competitiveness: Facilitating rupee transactions can improve India’s trade competitiveness by lowering transaction costs and simplifying payment processes for exporters and importers.
  • Strengthening Economic Sovereignty: Greater acceptance of the INR in global markets can enhance India’s economic sovereignty and reduce vulnerability to external economic shocks and geopolitical tensions.
  • Encouraging Foreign Investment: The ability to conduct transactions in INR may attract more foreign investors looking for stable investment opportunities in India

Way forward: 

  • Strengthen Global Agreements: Expand bilateral and multilateral trade agreements to encourage invoicing and settlement in rupees, promoting its global acceptability.
  • Enhance Domestic Financial Infrastructure: Improve financial systems to support seamless cross-border rupee transactions, including achieving full capital account convertibility and increasing trust in the INR.

Mains PYQ:

Q How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India? (UPSC IAS/2018)

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