‘Beneficial For Exporters, Importers': BAML's Jayesh Mehta On Internationalisation Of Indian Rupee

The Reserve Bank of India's (RBI) inter-departmental group (IDG) recently said that the Indian rupee (INR) has the potential to become an internationalised currency. It also suggested a pathway including the inclusion of the rupee in the Special Drawing Rights (SDR) basket and recalibration of the foreign portfolio investor (FPI) regime. The opening of rupee accounts for non-residents (other than nostro accounts of overseas banks) and integration of the Indian payment systems with other countries for cross-border transactions were also part of the IDG's recommendations.

According to the IDG, the rupee has the potential to establish itself as a global currency due to India's rapid economic growth and impressive resilience in challenging times. The report added that to promote the internationalisation of INR, the measures would include simultaneous liberalisation of the capital account, promoting international usage of INR, and strengthening financial markets. 

But how does the internationalisation of the rupee play out then, what does it mean or not mean at this point in time? To understand this better, founder and editor of The Core Govindraj Ethiraj spoke to Jayesh Mehta, Managing Director & Treasurer of Bank of America Merrill Lynch. 

Here are the edited excerpts from the interview: 

What does the internationalisation of the rupee mean? What would it mean for an exporter or an importer in the short-term period?

I think everybody has a different view (on this subject). My view is that the media generally runs much ahead of the RBI's thought process. This is a personal interpretation of the RBI's thought process. Typically,  when we talk about internationalisation of rupee, the media thinks of de-dollarisation. However, I feel that it is not an immediate concern for the RBI. 

Earlier also we had a few neighbouring countries, including Singapore, where we could raise invoices in rupee. Now the RBI is widening that to more areas where one can settle their trade transactions in rupees. That is what they mean by internationalisation of the rupees i.e. foreigners can have rupee exposure.  As for de-dollarisation, it is still maybe 8-10 years away. 

What would internationalisation of the rupee mean for an exporter or an importer in the short-term period?

There are two parts. The first is from the users – whether exporter or importer– perspective. They do not have to really worry about the currency hedge part of it and their counterparts internationally will now be more bothered about the currency and that is why we say it is the adjustment in rupees. See, ultimately the global currency is dollars and your pricing will be derived out of dollars. So even though you may settle in rupees, it's just the risk which is there on the Indian traders, buyers or sellers, exporters or importers isn't counterparty. My personal view is that it doesn't matter much. 

 

The report talks about aspects such as creating a template, a standard approach for invoicing, and opening a rupee account for Non-Resident Indians (NRI). How is all of this taking us in that direction? What are the demand-supply forces at play here? 

Singapore had allowed exactly the same thing a long time back. The only is that the NRIs can now earn some interest on their account if there is any Indian Rupee (INR) there. But otherwise, it's a question of whether the counterparties are willing to do that or not. That's where the challenge is until we become sizable enough globally. Maybe just like people are now comfortable dealing in Chinese Yuan and Australian Dollar, at some point in time, people would be more comfortable dealing with pure INR. Unless they have some linkages, an importer or an exporter may be indifferent to dealing with Indian currency. But there is definitely reluctance from the counterparty side as of now.

 

This is a policy-led desire or a strategy perhaps. But on the ground, do you see any such ask or any move? 

It's not even now, even if you look at the last two, or three years, we do see some trades from Singapore coming on and off. Singapore and India are more aligned and sometimes if the counterparty in Singapore is having multiple transactions, both import and export to India,  they are more willing to do it. However, in my opinion, it becomes difficult for them to have INR exposure if they do not have a two-way flow with India. So even right now, post-Russia war, it's all about the trade balance -- whether it's the country level or whether it's the individual level. 

 

What is the size to begin to have some clout? It is subjective, but this obviously means the economic size or amount of trade that we do.

I think there are two aspects of size here. The first is if it starts trading internationally, then you have a lot of people having exposure to India. The second is linked to the flow. An individual company or country which has enough inflow and outflow with India would be more willing to have their trade settled in rupees. 

However, as I mentioned earlier, if the individual or the country just has a one-way flow they would not be really comfortable on just the plain rupee. And by size, I also like to think that it has become more resilient and is not going to be a depreciating currency, which it looks like but it's too early to say.

 

The IDG report talks about full convertibility. It says that capital account convertibility is not a precondition for internationalising the rupee or vice versa. We are also talking about putting checks on the Liberalised Remittance Scheme(LRS). So we are not opening up as much as perhaps we desire on the policy side when it comes to the real world. 

Yes and no. But I think it's more restrictions coming from the government, more on the taxation side, tracking the tax avoidance. I do not really see LRS restrictions as being RBI restrictions and that is my personal view. 

RBI is not restrictive on the LRS. It is just the TCS (Tax Collected at Source). That aspect is more ministry-driven because they felt that a lot of people buy LRS more than the limits, but they don't have an income to match. 

As far as full convertibility goes, I completely agree. It's not a precondition that we need to be fully convertible. If we are fully convertible, then the size matters because then you might be importing from India. But then you might be exporting somewhere else where you can settle in rupees. However, as of today, it's going to be more like a bilateral with the company or a bilateral with the country where you need to have both sides of the flow. 

We have now allowed the rupee account to earn interest or invest in government securities. However, at the end of the day, that rupee being here does not help unless I have large imports from India. Otherwise, for the country and for me, it's one and the same, because when I convert that back into any other currency, even though I might have settled in rupee, it is still a foreign currency outflow.

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