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).
Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India? [UPSC Civil Services Exam – 2022 Prelims]
(a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment.
(b) A foreign company investing in Indian and paying taxes to the country of its base on the profits arising out of its investment.
(c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India.
(d) A foreign company transfers shares and such shares derive their substantial value from asset located in India.
Answer: d
Source: The Hindu