Updated: Nov 27
This article was written by Somnath Deb, a student from the Department of Economics at Vivekananda College Thakurpukur, India.
In July, 2022, when the RBI first introduced a circular on “International Trade Settlement in Indian Rupees”, many experts were sceptical regarding such a huge initiative on the part of the policy makers. Let’s see why?
As we all know, internationalisation of currency entails a process involving increasing use of the local currency in cross-border transactions. The introduction of such a policy, although perhaps tempting to some, might create greater drawbacks than initially expected. Exchange rate volatility, financial vulnerability, and risk of speculation from foreign investors creating pressure on maintenance of reserves as a result of this policy would all serve to raise questions as to its validity.
Additionally, the attempt to create international trade settlements in Indian rupees would mean a fall in the Rupee’s contribution to world GDP, trade imbalance, chronic current account deficit and a smaller share of global exports stagnating at around 2%.
As many experts report on the above causes, many people echo the sentiments published on 17th May, 2023 in the Deccan Herald that the “Rupee is a long way from replacing the dollar”. This article was published in response to the Indian Government’s proposed RBI, shedding light on the negative consequences it could have on India’s trade.
Previously, the Indian government encouraged trade settlements in rupees across 18 countries including Singapore, Malaysia, Germany, Russia, and Sri Lanka. India approached all these countries with a request to open a Special Vostro Account to do these transactions. This special type of account would be created within an Indian Bank, and would only accept payments from the corresponding banks that India’s trade partners have selected to handle the transaction.
Unfortunately, the plan didn’t work out as envisioned as we saw in the coming months. Russia was the first to respond to this saying it was unwilling to accept rupees due to exchange rate volatility, instead preferring the Chinese yuan or the United Arab Emirates dirham. However, a lopsided trade relationship between the two countries has forced it to accumulate up to $1 billion each month in rupee assets that remain stranded outside the country.
Challenges for India became more apparent as India struggled to pay for a surge in cheap Russian oil imports in rupees. Moscow accounted for almost half of India’s oil imports in May, from less than 2% before the invasion of Ukraine, according to data from analytics firm Kpler.
New Delhi has also been cautious in opening up its markets. First, it refused to give tax exemptions for trading on international bond platforms that would have made it easier for India’s inclusion in global debt indexes than it withdrew a plan to issue sovereign bonds in overseas markets. This insecurity of India’s capital and currency controls raises even larger questions about the third-biggest economy in Asia’s ability to sustain its plans for International Trade in Rupees.
“Internationalisation is a process – we don’t look upon it as an event or a target that has to be reached by a particular date,” RBI Governor Shaktikanta Das said in an interview to the Central Banking magazine published on 30th June, this year.
[Extract taken from, the article published on The Economic Times, July 07, “Modi’s push to take rupee global takes off a slow start”.]
When looking at this proposition by the Indian government, we have to centre our analysis within the broader geopolitical movements of the time. India’s move mirrors the growing resistance to the hegemony of the US dollar. Brazil and China recently struck a deal to settle trade in their local currencies, seeking to bypass the greenback in the process. Even France is starting to complete transactions in yuan.In this turmoil, the internationalisation of the rupee has made China’s imports cheaper as the rupee gains value over the yuan, a benefit sure, but I imagine not one in the direction the Indian government was hoping.
India might be the world’s fastest growing economy and will be the second largest contributor to world’s GDP by 2028, according to the International Monetary Fund (IMF), but reservations remain as to the Indian government’s ambitions given that India’s journey to economic stardom is still barely getting off its feet.
Reviewing the data, we can safely say that India has a long way to go until it enters the conversation for currency dominance in global markets. The same organisation, IMF, has released a long report talking about this in detail, which is being shared here for a read to all.
What are the Specific Reforms that India can pursue to Internationalise the Rupee?
Make the Rupee More Freely Convertible: With a goal of full convertibility by 2060, letting financial investments move freely between India and abroad. This would allow foreign investors to easily buy and sell the rupee, enhancing its liquidity and making it more attractive.
Pursue a Deeper Bond Market: Enabling foreign investors and Indian trade partners to have more investment options in rupees, enabling its international use.
Encourage Exporters/Importers for Transactions in Rupee: Optimising the trade settlement formalities for rupee import/export transactions would go a long way.
Sign Additional Currency Swap Agreements: As with Sri Lanka, to allow India to settle trade and investment transactions in rupees, without resorting to a reserve currency such as the dollar.
Offer Tax Incentives: Offer Tax Incentives to Foreign Businesses to Utilise the Rupee in Operations in India.
Ensure Currency Management Stability and Improve the Exchange Rate Regime: Avoid sudden or drastic changes such as devaluation or demonetisation that can impact confidence.
Ensure consistent and predictable issuance/retrieval of notes and coins.
Pursue the Recommendations of the Tarapore Committees: Such as reducing fiscal deficits lower than 3.5%, reducing gross inflation rate to 3%-5%, and reducing gross banking non-performing assets to less than 5%. [All information are collected from drishtiias.]
The views and opinions expressed in this article belong solely to the writer and do not necessarily reflect the views and opinions of the Warwick Economics Summit.