The Reserve Bank of India (RBI) is currently focused on developing a roadmap for the internationalization of the rupee, India’s local currency. This initiative has gained significance in light of the economic sanctions imposed by the United States on Russia. The internationalization process aims to promote the wider acceptance and use of the Indian rupee in cross-border transactions.
Promoting International Trade Settlement in Rupees:
To encourage the use of the rupee in cross-border transactions, the RBI has taken several steps. In July 2022, the RBI introduced additional arrangements for invoicing, payment, and settlement of exports and imports in rupees. As a result, India witnessed its first settlement of foreign trade in rupees with Russia in December 2022. Furthermore, banks from 19 countries, including the UK, New Zealand, Germany, Malaysia, Israel, and the United Arab Emirates, have been permitted to make settlements in rupees.
Advantages of Internationalization of the Rupee:
The internationalization of the rupee offers numerous advantages for India’s economy and businesses. By using the rupee in cross-border transactions, Indian businesses can mitigate currency risks and protect themselves from volatility. This reduction in currency risk not only lowers the cost of doing business but also enhances the growth potential of Indian businesses on a global scale. Additionally, reducing dependence on foreign currency reserves makes India less vulnerable to external shocks and improves external stability. As the use of the rupee becomes more significant, it strengthens the bargaining power of Indian businesses, elevates India’s global stature, and adds weight to the Indian economy.
Recommendations for the Internationalization of the Rupee:
The RBI’s inter-departmental group has put forth recommendations to facilitate the internationalization of the rupee in the short, medium, and long term.
Short-Term Recommendations:
In the short term, the group suggests adopting a standardized approach for examining proposals on bilateral and multilateral trade arrangements involving the rupee. This includes encouraging the opening of rupee accounts for non-residents and integrating Indian payment systems with other countries for seamless cross-border transactions. Strengthening the financial market by fostering a 24×5 global rupee market and recalibrating the foreign portfolio investor (FPI) regime are also suggested.
Medium-Term Recommendations:
Over the next two to five years, the group recommends reviewing taxes on masala bonds (rupee-denominated bonds issued by Indian entities outside India), exploring the international use of Real-Time Gross Settlement (RTGS) for cross-border trade transactions, and considering the inclusion of Indian Government Bonds in global bond indices.
Long-Term Recommendations:
In the long term, efforts should be made to include the rupee in the International Monetary Fund’s (IMF) Special Drawing Rights (SDR). The SDR is an international reserve asset based on a basket of five currencies: the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling. Inclusion in the SDR would further enhance the rupee’s international recognition and strengthen India’s position in the global economy.
