Internationalisation of the Indian Rupee

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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

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• 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.