Internationalisation of the Indian Rupee: A New Chapter in India’s Economic Journey

The Indian Rupee’s journey towards internationalisation, the process of increasing its use in cross-border transactions, is steadily gaining momentum. This strategic move aims to bolster India’s economic strength, reduce reliance on foreign currencies, and enhance its global financial standing.

Existing Mechanisms Propelling the Rupee Forward

India has, over the years, laid down a foundational framework to encourage the Rupee’s use in international trade and finance. Key existing mechanisms include:

1. Rupee Trade Settlement Mechanism: In July 2022, the Reserve Bank of India (RBI) introduced a significant measure allowing international trade settlements in Indian Rupees. This framework permits invoicing, payment, and settlement of exports and imports in INR. To facilitate this, authorised dealer (AD) banks in India can open Special Rupee Vostro Accounts (SRVAs) for correspondent banks of partner countries. As of early 2023, banks from numerous countries, including Russia, Sri Lanka, and Mauritius, have been permitted to open SRVAs, with reports indicating that around 18-22 countries are part of this arrangement.
2. Currency Swap Agreements: The RBI has inked currency swap agreements with several nations. These agreements allow for the exchange of local currencies between central banks, mitigating exchange rate risks and promoting bilateral trade in national currencies. India has a significant bilateral swap arrangement with Japan.
3. Masala Bonds: Indian entities are permitted to issue Rupee-denominated bonds in overseas markets, known as Masala Bonds. This allows Indian corporates to raise funds in Rupees from international investors, thereby increasing the global circulation and demand for the Rupee.
4. Asian Clearing Union (ACU): India is a member of the ACU, a regional payment arrangement that facilitates the settlement of trade transactions among member countries on a multilateral basis. Efforts have been made to include the Rupee as a settlement currency within the ACU.
5. GIFT City (Gujarat International Finance Tec-City): Developments in GIFT City are aimed at creating an international financial services hub, which can play a crucial role in promoting Rupee-denominated transactions and financial products.
6. Unified Payments Interface (UPI) Internationalisation: India is actively promoting its indigenous payment system, UPI, for cross-border transactions. Agreements have been signed with several countries to enable UPI payments, facilitating seamless and cost-effective fund transfers.
7. Liberalised FEMA Regulations: The RBI has been progressively liberalising regulations under the Foreign Exchange Management Act (FEMA), 1999, to encourage the use of the Rupee for cross-border trade settlements. This includes allowing overseas branches of Indian AD banks to open INR accounts for non-residents and permitting non-residents to settle transactions with other non-residents using balances in their repatriable INR accounts.

The Need for Evolving Mechanisms

While existing mechanisms have set the stage, several factors necessitate further changes and enhancements to accelerate the Rupee’s internationalisation:

1. Reducing Currency Risk and Transaction Costs: Greater use of the Rupee in international trade shields Indian businesses from exchange rate volatility and reduces the costs associated with currency conversions.
2. Lowering Dependence on Foreign Currencies: Internationalisation diminishes the reliance on major reserve currencies like the US Dollar, thereby reducing the need to hold large foreign exchange reserves and making India less vulnerable to external shocks.
3. Enhancing Global Stature and Bargaining Power: A more widely accepted Rupee elevates India’s economic influence and strengthens the bargaining power of Indian businesses in global markets.
4. Promoting Economic Growth: The internationalisation of the Rupee is considered essential for India’s continued economic progress.
5. Managing Trade Deficits: While a challenge, a more internationalised Rupee could, in the long run, help in better management of trade imbalances.
6. Facilitating Capital Account Convertibility: Although India currently has partial capital account convertibility, a gradual move towards fuller convertibility is often cited as a long-term goal that aligns with Rupee internationalisation.
7. Countering Geopolitical Shifts: In a changing global economic landscape, promoting the domestic currency offers a degree of financial autonomy.

Key Institutions Involved

The drive to internationalise the Rupee is a collaborative effort involving several key institutions:

1. Reserve Bank of India (RBI): As the country’s central bank, the RBI is at the forefront of this initiative. It formulates policies, issues guidelines, and creates enabling frameworks for Rupee-based international transactions. The RBI also manages currency swap agreements and oversees the functioning of payment and settlement systems. An Inter-Departmental Group (IDG) constituted by the RBI has been examining issues and suggesting a roadmap for Rupee internationalisation.
2. Government of India (Ministry of Finance and Ministry of Commerce): The government plays a crucial role in creating a conducive policy environment, entering into bilateral and multilateral trade agreements that promote local currency settlement, and championing the Rupee on international forums. The Directorate General of Foreign Trade (DGFT) aligns foreign trade policy with RBI’s initiatives for Rupee settlement.
3. Authorised Dealer (AD) Banks: These banks are the operational arms for implementing the RBI’s policies, facilitating Rupee-denominated trade transactions, and opening SRVAs for foreign banks.
4. National Payments Corporation of India (NPCI): The NPCI is pivotal in expanding the reach of Indian payment systems like UPI internationally, which indirectly supports the cause of Rupee internationalisation.
5. Exporters and Importers: The trading community’s adoption and willingness to invoice and settle in Rupees are critical for the success of this initiative.
6. International Financial Institutions: Participation of institutions like the World Bank and regional development banks in issuing Rupee-denominated bonds (like Masala Bonds) also contributes to the process.

The Path Ahead: Challenges and Opportunities

• The internationalisation of the Rupee presents both significant opportunities and challenges. Benefits include reduced exchange rate risk, lower transaction costs, enhanced global economic standing, and greater monetary policy autonomy.
• However, challenges remain. These include India’s persistent trade deficit, the need for deeper and more liquid domestic financial markets, ensuring currency stability, and managing potential impacts on domestic monetary policy (the “Triffin Dilemma” – a conflict between domestic monetary policy goals and the role of a global reserve currency). Full capital account convertibility, while a long-term aspiration for some, requires careful calibration to avoid external shocks.
• The journey towards making the Rupee a truly global currency is a gradual process, not an event. It requires sustained policy efforts, strengthening of financial market infrastructure, and increasing acceptance by global trading partners. As India’s economy continues to grow and integrate further with the global system, the internationalisation of the Rupee will remain a key strategic objective.