India should proactively take steps to increase the role of the rupee in the region, a recent study published by economists at the Reserve Bank of India said.
The study entitled 'Internationalisation of Currency: The case of the Indian Rupee and the Chinese Renminbi,' authored by RBI staff members Rajiv Ranjan and Anand Prakash, examines the costs and benefits associated with internationalisation of currency with specific cases of the Chinese renminbi and the Indian rupee. It also examines whether Indian rupee could be a candidate for internationalisation.
In the light of the significant strength exhibited by the Indian rupee in the recent months and continued good performance of the Indian economy, there is greater scope for internationalisation of the Indian rupee, the study said.
India has so far followed a calibrated approach towards capital account liberalisation. India, at present, does not permit rupee to be officially used for international transactions except those with Nepal and Bhutan.
The study noted that there are indications of Indian rupee gaining acceptability in other countries, although the exchange rate volatility problem associated with internationalisation of the rupee remains.
Withdrawal of short-term funds and portfolio investments by non-residents could also be a major potential risk of internationalisation of the Indian rupee, they pointed out.