The Reserve Bank of India on Wednesday announced various steps to promote internationalisation of the rupee. The central bank plans to introduce reference rates for currencies of India’s major trading partners to facilitate rupee-based transactions.
“This is expected to further deepen the onshore forex market and encourage banks to quote directly in a larger set of currency pairs, thus eliminating the need for multiple currency conversions and making trade more efficient,” the RBI said.
Deepening the forex market with new reference rates
The rupee rose 10 paise to 88.69 on Wednesday. “The rupee has witnessed some depreciation, accompanied by phases of volatility. The RBI is keeping a close watch on movements of the rupee and will take appropriate steps, as warranted,” said RBI governor Sanjay Malhotra.
“We are currently considering currencies such as the Indonesian rupiah and the UAE dirham, with more to follow. As active transactions are limited initially, the FBIL (financial benchmarks) will need to establish pricing references first, allowing the market to respond. The benchmark methodology will evolve as the market deepens, helping to gradually enhance the rupee’s international role,” deputy governor T. Rabi Sankar said in the press conference.
Currently, India has reference rates for dollar, euro, pound, and yen against the domestic currency. These rates are used for settlement of forex transactions, including derivatives.
Expanding investment & lending for rupee-based trade
To promote cross-border transactions, the RBI has allowed authorised dealer banks in India and their overseas branches to lend in rupee to residents of Bhutan, Nepal, and Sri Lanka.
Additionally, the RBI has permitted to invest the balances of special rupee vostro account (SRVA) in corporate bonds and commercial papers. In 2022, the central bank had allowed invoicing, payment, and settlement of trade in rupee to promote exports, allowing to invest balances in these accounts in government securities. A vostro account is an account held by a bank on behalf of a foreign lender.