“Internationalisation can potentially limit the ability of the central bank to control domestic money supply and influence interest rates as per domestic macroeconomic conditions,” the report said, adding, besides deep and sophisticated financial markets, the most important prerequisite for internationalisation of a currency is price stability.
rate, which is higher than the world average, undermines the use of the currency as an international medium of exchange and a store of value and can “restrict the role of such an economy in global value chains”.
On the contrary, stable prices build confidence of international investors in the domestic currency.
In this context, the primary focus of flexible inflation
targeting framework on price stability augurs well for further liberalisation of the capital account and internationalisation of the rupee, it said.
The report also mentioned the need to use the standing deposit facility (SDF), which absorbs liquidity without offering collaterals, as a sterilisation tool.
The SDF as a liquidity absorption tool is long awaited by market participants, and RBI
Governor Shaktikanta Das
has indicated in the past that it is an option available with the central bank if there was a need.
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