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The Reserve Bank of India (RBI) is accelerating efforts to internationalise the Indian rupee, with growing instances of exporters invoicing cross-border trade in the local currency. Deputy Governor T. Rabi Sankar stated that rupee internationalisation will be a key pillar in India’s journey towards becoming a developed economy.
About the Rupee Internationalisation
- Rupee internationalisation means increasing the use of the Indian rupee (INR) in global trade, financial transactions, and as a reserve currency by other countries.
- It means making the rupee:
- Accessible for cross-border transactions.
- Acceptable globally for trade and investment.
- Recognised as a reserve or settlement currency by other countries.
- Rupee internationalisation includes:
- Trade Invoicing and Settlement: Exporters and importers bill and settle trade in rupees instead of US dollars or other major currencies.
- Cross-Border Payments: Use of the rupee in international remittances and service payments.
- Financial Market Participation: Foreign investors buying Indian bonds and other assets in rupees, along with the growth of offshore rupee markets.
- Reserve Currency Status (Long-Term Goal): Other central banks holding the rupee as part of their foreign exchange reserves.
- It does not automatically mean full capital account convertibility. Instead, it is a gradual process where trade transactions are encouraged first, and full capital flows are opened later.
Global Context
- The push for alternatives to the US dollar increased after the Russia–Ukraine War in 2022, when the US froze Russia’s dollar assets.
- Russia was removed from SWIFT (Society for Worldwide Interbank Financial Telecommunication).
- Its access to the dollar-dominated global payment system was restricted.
- This situation showed the risks of depending too much on the US dollar–based global financial system.
- Because of this, many countries, including India, started exploring alternatives to the dollar for international transactions.
RBI’s Roadmap for Rupee Internationalisation
- In July 2023, an Inter-Departmental Group (IDG) submitted the first official roadmap for rupee internationalisation.
- The roadmap includes:
- 10 short-term milestones
- 5 medium-term milestones
- 1 long-term milestone
- In 2024, India’s Prime Minister stressed that the rupee should be “accessible and acceptable throughout the world”, providing policy direction for this initiative.
Local Currency Arrangements (LCAs)
- These are the agreements between central banks to settle trade in local currencies instead of hard currencies like the US dollar.
- Countries with MoUs (since July 2023): UAE, Indonesia, Maldives, Mauritius, and more under discussion.
- Operational Mechanism: Trade payments routed via Special Rupee Vostro Accounts (SRVA).
- 83 banks from 35 countries have opened SRVAs with Indian banks.
- Benefits:
- Reduces exchange rate risk for exporters.
- Reduces dependence on hard currencies.
- Enhances financial sovereignty.
Key Concerns & Issues Around Rupee Internationalisation
- Exchange Rate Volatility:
- Greater cross-border use of the rupee may increase speculative flows.
- Higher demand and supply fluctuations in offshore markets could make the rupee more volatile.
- Volatility can affect trade competitiveness and inflation.
- Pressure on Foreign Exchange Reserves:
- If global investors quickly convert rupee holdings into foreign currency during crises, it may put pressure on forex reserves.
- The RBI may need to intervene more often in currency markets.
- Monetary Policy Autonomy:
- Greater integration with global financial markets may reduce policy flexibility.
- Large foreign holdings of rupee assets can limit interest rate decisions.
- There can also be spillover effects from global monetary tightening.
- This relates to the Impossible Trinity: monetary independence, exchange rate stability, and capital mobility.
- Underdeveloped Financial Markets:
- For a currency to be widely accepted globally, a country needs deep and liquid bond markets.
- It also requires free and efficient capital markets and transparent regulatory systems.
- India’s financial markets are improving but are still not comparable to those of major reserve currency economies.
- Capital Account Convertibility Risks:
- Full internationalisation often requires capital account liberalisation.
- Opening the capital account too early can expose the economy to speculative attacks, sudden stops in capital flows, and financial crises (such as the Asian Financial Crisis of 1997).
- India currently follows a calibrated approach to capital account convertibility.
- Limited Global Demand for Rupee:
- Around 5% of India’s total international trade is currently settled in rupees.
- For a currency to internationalise, other countries must be willing to hold it as reserves, use it in trade invoicing, and invest in rupee assets.
- Geopolitical Risks:
- Efforts toward de-dollarisation may have geopolitical consequences.
- Countries using rupee settlement may face diplomatic pressure.
- Integration with alternative payment systems that bypass SWIFT could create tensions.
- Risk of Offshore Market Distortions:
- Offshore rupee markets (such as NDF markets) may influence domestic exchange rates.
- Differences between onshore and offshore rates can make policy management more difficult.
- SDR and Reserve Currency Challenges:
- For the rupee to become part of the IMF’s SDR basket or be included in CLS (Continuous Linked Settlement), India needs full convertibility, high liquidity, and stable macroeconomic fundamentals.
- Achieving this requires long-term structural reforms.
- Trade Imbalance Problem:
- Countries that accumulate rupees through exports to India must either invest those rupees back in India or use them to buy Indian goods.
- If trade is one-sided, holding rupees becomes less attractive.
Way Forward
- Deep and Liquid Financial Markets:
- Development of strong bond and forex markets.
- Simplification of FPI (Foreign Portfolio Investor) norms to attract more global investors.
- Offshore Rupee Ecosystem:
- Rupee banking services are allowed through offshore branches.
- NRIs can open rupee accounts abroad.
- NRIs in Nepal, Bhutan, and Sri Lanka are allowed to raise rupee loans.
- Payment System Integration:
- To reduce dependence on SWIFT, India is considering linking its payment systems with those of other countries.
- This includes systems such as RTGS (Real Time Gross Settlement) and SFMS (Structured Financial Messaging System).
- Long-Term Aspirations:
- Inclusion in Continuous Linked Settlement (CLS): This system currently settles 18 major currencies.
- Inclusion in the IMF’s SDR Basket: Achieving this would require long-term structural reforms.
Conclusion
- Rupee internationalisation is a long-term process, not something that happens quickly. It may take several decades to fully develop.
- The institutional framework—such as local currency arrangements, Special Rupee Vostro Accounts (SRVAs), inclusion of Indian bonds in global indices, and access to offshore rupee markets—shows that a structural shift is taking place. However, the current level of trade settled in rupees is still limited.
- As India aims to become a developed nation by 2047, making the rupee a convertible and reserve currency supports broader goals such as economic resilience, strategic autonomy, and financial sovereignty.
