Opinion Express View on internationalisation of Indian currency: The rupee challenge
It will have advantages for the Indian economy, but a cautious approach is called for
As the Indian economy grows in size, as its trade linkages with other countries grow stronger, more space will be created for using the rupee in international transactions. 
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An inter-departmental group constituted by the Reserve Bank of India to frame a road map for the internationalisation of the Indian rupee has submitted its report. The report comes against the backdrop of the Russia-Ukraine war, the subsequent imposition of sanctions and the weaponisation of the financial system which has led to apprehensions over excessive reliance on the dollar, leading to calls for diversification.
For an economy like India, the advantages from greater usage of its currency in international transactions are manifold. For one, it brings down the “exchange rate risk” for Indian exporters and importers, while curtailing the demand for US dollar. It also reduces the need to maintain a forex war-chest in order to “manage external vulnerabilities”, and, among others, makes the economy less at risk to “sudden stops and reversals of capital flows”.
The report has detailed several measures required to boost the rupee’s usage in international transactions. The short-term measures range from putting in place a uniform approach for dealing with trade arrangements “for invoicing, settlement and payment in the rupee and local currencies”, incentivising exporters to use the Indian currency for trade settlement, and integrating payment systems to provide seamless cross-border transactions. Among the more medium-term measures are synchronising tax regimes of India and other financial centres, and allowing banking services in the rupee outside the country, while in the long run, the objective could be to include the rupee in the IMF’s SDR (special drawing rights) basket.
However, the path to internationalisation is likely to be challenging. As per reports, even though the central bank had allowed banks in July last year to settle international trade in rupees with 18 countries, there has been little traction for this facility so far. Russia, for instance, reportedly prefers the yuan or the dirham as a medium of transaction, even though there has been a sharp rise in oil imports from the country. A few months ago, Russian Deputy Prime Minister, Denis Valentinovich Manturov had said that “because of a lack of imports from India, it’s not enough to use the rupee”.
The quest for internationalisation will involve providing greater frictionless freedom to transact in the rupee. Moreover, the depth and breadth of financial and foreign exchange markets, the extent of frictions therein, will also play a critical role in determining the pace of internationalisation of the currency. As the Indian economy grows in size, as its trade linkages with other countries grow stronger, more space will be created for using the rupee in international transactions. But, a cautious approach is called for.
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