Q. Which of the following is/are the benefits of Internationalisation of the rupee?
1.Mitigates currency risk for Indian businesses.
2.Reduces the need for holding foreign exchange reserves.
3.Make non-residents having Rupee holdings to come and stay in India permanently.
Select the correct answer from the codes given below;

[A] 1 and 2 only

[B] 2 and 3 only

[C] 1 and 3 only

[D] 1, 2 and 3

Answer: A

Statement 1 and 2 are correct:

The advantages of the Internationalization of the Rupee are

Firstly, the use of the Rupee in cross-border transactions mitigates currency risk for Indian businesses. Protection from currency volatility not only reduces the cost of doing business, but it also enables better growth of the business, improving the chances for Indian business to grow globally.

Secondly, it reduces the need for holding foreign exchange reserves. While reserves help manage exchange rate volatility and project external stability, they impose a cost on the economy.

Thirdly, reducing dependence on foreign currency makes India less vulnerable to external shocks. For example, during phases of monetary tightening in the US and the strengthening of dollar, excessive foreign currency liabilities of domestic business results in a de facto domestic tightening. Reduced exposure to currency risk would substantially mitigate the pain of the reversal of capital flows.

Statement 3 is incorrect: Non-resident holdings of Rupees could exacerbate the pass-through of external stimulus to domestic financial markets, increasing volatility. For instance, a global risk-off phase could lead non-residents to convert their Rupee holdings and move out of India.

Source: Internationalisation of Rupee