Context:
RBI-appointed working group recommended various measures to accelerate the pace of internationalisation of the rupee.
About Internationalisation of the rupee:
- The process that involves increasing use of the local currency (Rupee) in cross-border transactions.
- It promotes the rupee for import and export trade, current and capital account transactions.
- Denotes adopting full capital account convertibility, i.e., freedom to convert local financial assets into foreign financial assets and vice versa.
- Current Account Convertibility is the freedom or ability to convert domestic currency into any foreign currency and vice-versa
- Currently, India allows partial Capital Account Convertibility (CAC) and full current account convertibility.
- Committee for CAC: Tarapore Committee
- Initiatives –
- Introduction of Masala Bonds allowing Indian corporate to issue rupee denominated bonds overseas
- 23 currency swaps agreed since 2018 with other nations including UAE, SAARC countries etc.
- RBI allowed trade settlement in rupees through Special Vostro Accounts
Triffin dilemma (Triffin paradox):
- Coined by: Economist Robert Triffin
- It refers to an unpleasant situation in international economics that arises when a country’s currency serves as the global reserve currency.
- A country that issues a reserve currency must balance its interests with the responsibility to make monetary decisions that benefit other countries.
- Issues related –
- Conflicts of interest between short-term domestic and long-term international economic objectives.
- Tension between national monetary policy and global monetary policy
Explore Terms
- Balance of Payments (BoP): It is a record of transactions between people of a country and the rest of the world over a specific time period, generally a year.
- 2 components: Current and Capital account
- Current account: Import and export of goods and services
- Capital account: Cross-border movement of capital by way of investments and loans.
- Vostro (Latin: Yours) Account: A bank account that a foreign bank at a domestic bank in the domestic bank’s currency. E.g. HSBC Vostro account is held by SBI in India (Rupees).
- Nostro (Latin: Ours) Account: A bank account that a bank holds in a foreign country’s currency at another bank in that country. E.g. SBI’s account with Bank of America in US (Dollars).
[UPSC Civil Services Exam – 2022 Prelims]
- An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment.
- A foreign company investing in Indian and paying taxes to the country of its base on the profits arising out of its investment.
- An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India.
- A foreign company transfers shares and such shares derive their substantial value from asset located in India.
Source: The Hindu
