Can the rupee go global without convertibility?
An e-rupee may hold an edge in pursuit of an ambitious aim set by India’s PM, but we need to grapple with how capital controls could be eased to enable the currency’s globalization
Last week, Prime Minister Narendra Modi asked the Reserve Bank of India (RBI) to prepare a 10-year strategy to make the Indian rupee a globally “accessible and acceptable” currency. Since the Indian economy is expected to be among the world’s three biggest national economies in less than a decade, with only China’s and America’s larger than ours, it is easy to grasp why such an aim might beckon. It’s more than a matter of prestige. A globalized currency confers major advantages. Above all, overseas demand for it—particularly for trade and reserves—would cheapen credit within the country. More rupee bonds being bought will push their yields down, so we’d effectively have foreigners lending us funds at lower rates. The US has long had a clear edge on cost-of-capital, thanks to its dollar being the globe’s dominant currency, with even the euro unable to dislodge it. A global rupee would also be convenient for Indian economic agents; who wants foreign exchange risk? For the currency to actually go global, though, our economy would also have to globalize: Not only will we need a surge in demand abroad for what we produce, we would have to turn the rupee fully convertible.
So far, US-style capital account convertibility has been a non-starter of an idea. It gave policymakers shudders after the Asian currency crisis of 1997, which saw several open economies battered by capital flight and short-sellers like George Soros accused of betting on currencies crashing. Since then, India has stuck with an old ban on anyone limitlessly converting rupees into foreign money, with an annual cap on conversion and special channels for the settlement of commercial trades deemed okay. The rupee is thus partially convertible, with the privilege of converting large sums restricted to regulated entities. Yet, if we expect our currency to hold liquidity appeal around the world, like the US dollar does, capital controls would have to be dropped entirely. Whether this can be done safely was examined by a panel set up by RBI in 1997, and some of its advice for a prudent switch to a fully convertible rupee remains relevant. For one, our currency must not keep losing its internal value to inflation. This calls for fiscal discipline. For another, we need a banking system that’s resilient in the face of shocks and backed by transparency and efficiency across the financial sector. Plus, our external balances need sustainable stability; our trade gap must not get cleaved apart by events beyond our control. To these, add clarity on the external value of the rupee being set by the market, with RBI resolutely playing a non-distortive role.
The list of asks is daunting. Technology, however, could yet lend RBI’s e-rupee an edge as a central bank digital currency (CBDC) for global use if it is designed not just for minimal cost, but also utmost privacy. Initial diaspora use for lowcost cross-border transfers could conceivably expand to sundry other purposes, commercial needs included, should it be kept free of geopolitical sanctions (and Swift-type disruptions). As a direct liability of RBI, with no risk of an intermediary failure, the e-rupee might also find international takers if it assures its users an easy way to program it (say, for routine payments), a unique feature of CBDC software. Right now, the e-rupee is only an experiment, with online bank-to-bank UPI transfers being hyped, but it’s also RBI’s best bet for a global play. Of course, RBI will have to earn itself the reputation of a worthy issuer. And that would call for the macro stability outlined in 1997.