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Reserve Bank of India (RBI) & Maldives Monetary Authority (MMA) have signed a Memorandum of Understanding to establish a framework for promoting the use of local currencies for cross-border transactions.
- India has been promoting use of local currencies as part of its efforts to internationalize the rupee and reduce US dollar dependency.
About Internationalization of Currency (Rupee):
- Currency internationalization is described as the international extension of a national currency’s basic functions of serving as a unit of account, medium of exchange and store of value.
- E.g., Involves Promotion of the rupee for current account transactions and foreign trade.
Significance of Internationalization of Rupee
- Counter trade risk: Internationalization of Rupee enables domestic firms to invoice and settle international trade in local currency, reducing exchange rate risks.
- Broader financial Access: Domestic entities can tap international markets as IR reduces cost of capital & expands financing options.
- Reserve Management: Reduces need for maintaining large foreign exchange reserves, lowering associated costs and external vulnerabilities.
Challenges in Internationalization of Rupee
- Initial stages may see significant currency fluctuations
- Global currency supply obligations would conflict with domestic monetary control needs (Triffin Dilemma)
- Increased exposure to international shocks through unrestricted cross-border capital flows.
Steps taken towards Internationalization of Rupee
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