MUMBAI, March 9 (Reuters) - India needs to gear up to
manage the inevitable volatility that will emerge in the foreign
exchange market as the country progresses further towards
internationalisation of the rupee, a deputy governor at the
Reserve Bank of India said recently.
An international currency is one that is freely available to
non-residents, essentially to settle cross-border transactions,
and in the case of the rupee, this will be achieved by promoting
the currency for import and export, without any limits.
But, that will make the rupee more reactive to global events
and that would increase outflows, increasing volatility.
"It is now widely accepted that while internationalisation
and a freer capital account comes with its own set of benefits,
it is not without risks," M. Rajeshwar Rao said.
"Freer capital flows come with their own set of challenges,
the primary one being that of volatility and we need to gear up
to manage that."
Rao did not expand on how to manage the volatility in his
comments, which were part of his keynote address at a conference
organised by the Foreign Exchange Dealers' Association of India
(FEDAI) on Sunday. The RBI published a copy of the speech on its
website on Thursday.
India has increasingly aimed to promote trade denominated in
rupees. Last July, the RBI introduced a new mechanism to settle
international trade in rupees, aiming to promote exports and
facilitate imports.
Rao said there was a "good amount of interest" in the rupee
trading arrangements the RBI was putting in place. And if the
central bank's efforts towards rupee-invoicing bear fruit, local
exporters and importers will not need to hedge, he added.
While Rao cautioned that increasingly interconnected markets
will bring greater challenges, there were also opportunities.
New frontiers will also emerge as Indian banks expand their
presence in offshore markets, non-residents participate more in
domestic markets, and technological changes continue to
transform the way markets function, he said.
In such an environment, Rao said, the RBI remains committed
to continuously move ahead steadily and in line with the
changing macro-financial environment globally and domestically.
(Reporting by Siddhi Nayak; Editing by Savio D'Souza)
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