The Indian Rupee (INR) has fallen sharply against the US Dollar (USD) in the last one month. This has resulted in the purchasing power of the INR in the international market diminishing and has increased import costs significantly. India, which is heavily dependent on oil imports, suffers severely due to the devaluation of the INR.
In a proactive response to this challenging situation, last July India had signed the pact with UAE to pay oil bill in INR. This is a roundabout arrangement. India had also executed INR trades in Russian oil imports. Currently, India imports crude oil from 39 countries, thus a wide scope for such arrangement with other countries.
With the latest news coming, talks are going on for RBI takings measures to make INR acceptable in Thailand, an increased overseas holiday destination for Indians.
RBI had put in place the mechanism for rupee trade settlement with eighteen countries by allowing banks from these countries to open Special Vostro Rupee Accounts (SVRAs) for settling payments.
All these steps of using INR as a payment mechanism instead of paying in foreign currency (USD in this case) leads towards the Internationalization of INR. Once this process is successfully implemented, it will provide following benefits to investors (both local and global) in a longer term:
- Reduction in the exchange rate volatility and currency appreciation
- Increase in foreign capital inflows in the economy due to reduction in currency fluctuation risk, given that most of global businesses want to set up the shop in India and investors want to bet on the opportunity available
- Reduce import cost and thereby narrow current account deficit and strengthen countries’ balance sheet
- benefit India with enhanced geo-political influence on account of strengthened economic ties with other countries to be developed from bilateral trade agreements
- Reduce the pressure on RBI with requirement of maintaining high USD reserves (an all-time high of $645.6 billion as of March 29)
One of the major reasons for America being a superpower is its rock-solid currency, which accounts for more than half of all global Central Banks’ foreign currency reserves. Most of the global trade takes place in USD. It gives USA an ease to print more money and facilitates taking more debt from other countries. Currently, India is the fastest growing major developing economy in the world. Very soon it is expected to be the third largest economy. Global sentiments are bullish on the Indian economy. JP Morgan and Bloomberg have recently added India to their Global Emerging Market Bond Index. Against this robust backdrop, it is a promising case to aim for making INR an alternative reserve currency. The incremental steps taken by the Government of India (GoI) and the Reserve Bank of India (RBI) to promote global acceptance of INR are in the right direction and commendable.
The internationalisation of the INR will not only save transaction costs on foreign trades but also directly yield dividends for the Indian financial market. Capital flows in the debt market and equity market will surge as INR becomes a stronger currency. Liquidity and investor faith in the market will improve.
Additionally, the stable and solid INR will increase purchasing power for Indians and promote the economic well-being as well as better returns for global investors. Thus, internationalization of INR ensures win-win situation for India as well as the global economy.
Technical Outlook:
The Indian market grappled with heightened volatility last week due to escalating geopolitical tensions in the Middle East. The Nifty corrected by 1.65% over the week, settling at 22,147. Companies have begun to declare their Q4 results leading to expectations of significant market oscillations.
The India VIX, a key volatility indicator, surged by approximately 16%—its most significant weekly gain this calendar year. Foreign Portfolio Investors (FPIs) continued to offload equities. The Nifty remains below its critical 50-day moving average (DMA) indicating weaker market sentiment across various sectors, with Nifty IT dropping by 4.7% last week.
Immediate support is anticipated at around 21,800, while resistance is expected at 22,400. Until the Index surpasses the 22,400 mark, a “sell on rise” strategy is recommended for next week.
