Daily Current Affairs : 7-July-2023

The internationalisation of a currency refers to the process of making it globally accepted and used in cross-border transactions. India aims to achieve this status for the Indian rupee, joining the ranks of major currencies like the US dollar, Euro, and Japanese yen. This essay explores the advantages and disadvantages of making the rupee a global currency.

Advantages:
  1. Sign of Stable and Mature Markets:
    • Full convertibility demonstrates that a country’s markets are stable and mature, attracting investments and strengthening the economy.
  2. Increased Liquidity in Financial Markets:
    • Opening up to global players brings more liquidity to the country’s financial markets, benefiting investors, businesses, and trade partners.
  3. Improved Employment and Business Opportunities:
    • Internationalisation creates new employment opportunities across various sectors and fosters entrepreneurship, contributing to economic growth.
  4. Onshore Rupee Market Development:
    • Full convertibility enhances the domestic market by promoting greater trade and global flow of the Indian currency, resulting in improved liquidity and better regulation.
  5. Easy Access to Foreign Capital:
    • Local businesses can obtain foreign loans at lower costs and interest rates, facilitating expansion and growth.
  6. Better Access to Goods and Services:
    • Opening the Indian market to global players fosters competition, benefiting consumers with a wider range of choices and stimulating economic growth.
  7. Progress in Multiple Industry Sectors:
    • Full convertibility attracts foreign direct investments (FDIs) in sectors such as insurance, fertilizers, and retail, promoting growth and development.
  8. Outward Investments:
    • Without limits or approvals, full convertibility enables Indian businesses to make outward investments, expanding their reach and opportunities.
  9. Improved Financial System:
    • Indian businesses can issue foreign currency-denominated debt, hold foreign currency deposits, and engage in foreign currency borrowing and lending, strengthening the financial system.
  10. Easy options for gold transactions:
  • Full convertibility allows the buying and selling of gold freely, offering gold-based deposits and loans with higher or uncapped limits.
Disadvantages:
  1. High Volatility:
    • Lack of suitable regulatory control and a large number of global market participants may lead to high levels of volatility, devaluation, or inflation in forex rates, posing challenges to the country’s economy.
  2. Foreign Debt Burden:
    • While businesses can easily raise foreign debt, they are exposed to the risk of higher repayments if exchange rates become unfavorable, potentially increasing the burden of debt.
  3. Effects on Balance of Trade and Exports:
    • A rising, unregulated rupee may make Indian exports less competitive in international markets. Export-oriented economies like India and China prefer to maintain lower exchange rates to retain a cost advantage.
  4. Lack of Fundamentals:
    • India’s high dependence on exports, burgeoning population, corruption, socio-economic complexities, and bureaucratic challenges may pose setbacks in the post-convertibility era, requiring careful management and reforms.

Important Points:

Advantages:

  • Sign of Stable and Mature Markets
  • Increased Liquidity in Financial Markets
  • Improved Employment and Business Opportunities
  • Onshore Rupee Market Development
  • Easy Access to Foreign Capital
  • Better Access to Goods and Services
  • Progress in Multiple Industry Sectors
  • Outward Investments
  • Improved Financial System
  • Easy options to buy/sell gold freely and offer gold-based deposits and loans with higher (or even uncapped) limits.

Disadvantages:

  • High Volatility
  • Foreign Debt Burden
  • Effects on Balance of Trade and Exports
  • Lack of Fundamentals
Why In News

India is making significant strides towards positioning the rupee as a global currency, implementing robust economic reforms and fostering stronger international trade relations. The country’s strategic initiatives include liberalizing financial markets and expanding bilateral agreements to enhance the rupee’s acceptance and accessibility on the global stage.

MCQs about Internationalisation of the Indian Rupee

  1. Which of the following is an advantage of making the Indian rupee a global currency?
    A. Increased volatility in financial markets
    B. Restricted access to foreign capital
    C. Improved employment opportunities
    D. Reduced liquidity in domestic markets
    Correct Answer: C. Improved employment opportunities
    Explanation: Making the Indian rupee a global currency can lead to the creation of new employment opportunities across various industry sectors, as well as fostering entrepreneurship for new businesses.
  2. What is one potential disadvantage of full convertibility of the Indian rupee?
    A. Enhanced access to foreign capital
    B. Lower volatility in forex rates
    C. Negative impact on balance of trade and exports
    D. Strengthened financial system
    Correct Answer: C. Negative impact on balance of trade and exports
    Explanation: Full convertibility of the Indian rupee may result in a rising, unregulated rupee, making Indian exports less competitive in international markets, which can have a negative effect on the balance of trade.
  3. Which sector would likely benefit from full convertibility of the Indian rupee?
    A. Insurance
    B. Agriculture
    C. Public transportation
    D. Construction
    Correct Answer: A. Insurance
    Explanation: Full convertibility would attract foreign direct investments (FDIs) in various sectors, including insurance, fostering growth and development in that industry.
  4. What is a potential challenge associated with the internationalisation of the Indian rupee?
    A. Increased liquidity in financial markets
    B. Improved access to goods and services
    C. Lack of suitable regulatory control
    D. Easy options for gold transactions
    Correct Answer: C. Lack of suitable regulatory control
    Explanation: The internationalisation of the Indian rupee may pose challenges due to the lack of appropriate regulatory measures, which can result in high levels of volatility, devaluation, or inflation in forex rates, potentially impacting the country’s economy.

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