The Reserve Bank of India’s deputy governor recently said India should be prepared to manage the inevitable volatility in the foreign exchange market as it moves towards internationalization of the rupee.
An international currency is one that is freely available to non-residents, mainly to settle cross-border transactions, and in the case of the rupee, this is achieved by moving the currency without any restrictions on imports and exports.
But it makes the rupee more sensitive to global events and that increases outflows, increasing volatility.
“It is now widely recognized that while internationalization and the free capital account have their own merits, they are not without their risks,” said M. Rajeshwar Rao.
“The free flow of capital comes with its own set of challenges, the most important of which is volatility, and we have to be prepared to manage that.”
M. Rajeshwar Rao did not elaborate on how to manage volatility in his comments, which were part of his keynote address at a conference organized by the Foreign Exchange Dealers Association of India (FEDAI) on Sunday. The RBI published a copy of the speech on its website on Thursday.
India aimed to promote trade in Rs. Last July, the RBI introduced a new mechanism to regulate international trade in rupees, aimed at promoting exports and facilitating imports.
M. Rajeshwar Rao said there was “good interest” in the rupee trade arrangements set up by the RBI. And if the central bank’s efforts towards rupee invoicing succeed, local exporters and importers will not need to hedge, he added.
While M. Rajeshwar Rao warned that increasingly interconnected markets would bring great challenges, there were also opportunities.
New frontiers will emerge as Indian banks expand their presence in offshore markets, as non-residents become more involved in domestic markets and as technological changes continue to change the way markets operate, he said.
In such an environment, according to M. Rajeshwar Rao, RBI is stable and ready to move forward continuously in line with the changing macro-financial environment globally and in the country.
(Except for the title, this story was not edited by NDTV staff and was published on a syndicated channel.)
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