T Rabi Sankar: Internationalisation of the rupee - is it time to shift gears?

Keynote address by Mr T Rabi Sankar, Deputy Governor of the Reserve Bank of India, at the Annual Day event of the Foreign Exchange Dealers Association of India (FEDAI), Mumbai, 20 October 2022.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Good Evening. It gives me great pleasure to be part of the annual day event of the Foreign Exchange Dealers Association of India (FEDAI). Since its inception in 1958, FEDAI has played a crucial role in the smooth conduct of foreign exchange business and development of forex markets. This role assumes greater significance in today's age of rapidly evolving forex markets and innovations in financial products and instruments.

2. The global situation continues to experience uncertainty on multiple fronts, be it economics, geopolitics, or climate related. Coming close on the heels of the Covid-19 pandemic, these challenges have caused the plates of both policymakers and market participants alike to be full. I would, therefore, like to take this opportunity amidst this august gathering to share some thoughts on the progress of the Indian Rupee (INR) on the path of greater acceptance in international markets, or "internationalisation", its benefits and risks and conclude by offering a few suggestions which might aid the Rupee's onward journey. Before proceeding, it might be a good idea, however, to do a quick recap of the journey of Rupee markets thus far which will set the backdrop for our main theme of Rupee internationalisation.

3. The early stages of foreign exchange management in the country emphasized on control of foreign exchange by regulating demand due to its limited availability. Various controls were imposed on forex transactions through the Foreign Exchange Regulation Act (FERA) of 1947, which was subsequently replaced by a more comprehensive and rigorous framework through FERA, 1973. The approach to external sector management underwent a paradigm shift in the 1990s driven by the economic reforms introduced in 1991. In line with the recommendations of the High-Level Committee on Balance of Payments (Chairman: Dr C Rangarajan, 1993), exchange rate of rupee was made market determined in 1993. In 1994, India accepted Article VIII of the Articles of Agreement of the International Monetary Fund (IMF) making INR fully convertible on the current account. With enactment of the Foreign Exchange Management Act (FEMA) in 1999 to replace FERA, the approach shifted from that of conservation to the management of foreign exchange through facilitation of external payments.