Internationalisation of the Rupee

Internationalisation of the Rupee

Internationalisation of the Rupee refers to the increasing use of the Indian Rupee (INR) by residents and non-residents for cross-border transactions, including international trade, investment and other financial transactions. It involves promoting the rupee for import and export trade and then other current account transactions, followed by its use in capital account transactions.

In simple terms, it means expanding the use of the rupee beyond India’s borders, reducing the need to rely exclusively on international currencies such as the US dollar for cross-border transactions.

Greater Use of Rupee in International Transactions → Internationalisation of Rupee

Why Internationalise the Rupee? / Benefits of Currency Internationalisation

• Reduce Dependence on Foreign Currencies: Greater use of INR in international transactions reduces reliance on currencies such as the US dollar for settlement.
• Reduce Exchange Rate Risk: When Indian businesses invoice and settle transactions in rupees, their exposure to fluctuations in foreign currencies is reduced. This protection from currency volatility not only reduces the cost of doing business, it also enables better growth of business, improving the chances for Indian businesses to grow globally.
• International Finance: It permits domestic firms and financial institutions to access international financial markets without assuming exchange rate risk.
• New Opportunities for Financial Institutions: The internationalisation of rupee offers new profit opportunities to financial institutions, although this benefit may be offset in part by the entry of foreign financial institutions into the domestic financial market (to the extent that the government permits it).
• Government Borrowing in Domestic Currency: The government can finance part of its fiscal deficit by issuing domestic currency denominated debt in international markets, reducing the exchange rate risk associated with foreign currency borrowing.
• Easier Financing of Current Account Deficit: It may allow the government to finance part, if not all, of its current account deficit without drawing down its official reserves. The current account deficit may also be financed by private capital flows from abroad, especially from the banking system, as financing in domestic currency becomes integrated globally.
• Reduces Dependence on Foreign Exchange Reserves: Greater international acceptance of the domestic currency reduces the need to maintain and depend upon large foreign exchange reserves in convertible foreign currencies, along with the associated costs.
• Reduces Vulnerability to Capital Flow Reversals: Further, at the macroeconomic level, internationalisation of a currency results in lowering the impact of sudden stops and reversals of capital flows.
• Improves External Debt Repayment Capacity: It enhances the ability to repay external sovereign debt.
• Lower Transaction Costs: Reduced need for repeated currency conversion can lower foreign exchange and hedging costs for businesses.
• Facilitate International Trade: Rupee settlement provides an additional mechanism for conducting cross-border trade with willing partner countries.
• Reduce Demand for Foreign Exchange: Settlement of a greater share of imports in rupees reduces the need to obtain foreign currency for those transactions.
• Strengthen India’s Financial Integration: Wider international use of INR increases the role of Indian currency and financial markets in global transactions.

Challenges in Internationalisation of Rupee

While rupee internationalisation provides several benefits, greater international use of a domestic currency also creates challenges, particularly for exchange rate stability and the conduct of monetary policy.

• Greater Exchange Rate Volatility: It may result in the potential increase in volatility of its exchange rate in the initial stages.
• Triffin Dilemma: The obligation of a country to supply its currency to meet the global demand may come in conflict with its domestic monetary policies, popularly known as the Triffin dilemma.
  • Global Demand for Rupee ↑ → Need to Supply Rupee Internationally ↑ → Possible Conflict with Domestic Monetary Policy
• Greater Transmission of External Shocks: The internationalisation of rupee may accentuate an external shock, given the open channel of the flow of funds into and out of India and from one currency to another.
• Volatility in Demand for Money: International use creates additional foreign demand for the rupee, and this demand can fluctuate significantly. Although the central bank can distinguish much of the foreign demand through improved statistical reporting, uncertainty remains for some components, particularly currency held as cash.
• Limited Global Acceptance of INR: The rupee still accounts for a relatively small share of global trade, payments and financial transactions.
• Competition from Established International Currencies: The rupee competes with currencies such as the US dollar and euro, which already benefit from extensive international acceptance, deep financial markets and established payment networks.
• Depth of Financial Markets: Greater international use of a currency requires deep and liquid financial markets where foreign holders can invest and manage their rupee balances efficiently.

Steps Taken by India for Internationalisation of Rupee

• Local Currency Settlement Agreements: India and the RBI have entered into arrangements with partner countries to facilitate cross-border transactions in local currencies.
  • The Reserve Bank has signed MoU with the central banks of the United Arab Emirates, Indonesia and Maldives to encourage cross-border transactions in local currencies, including Indian Rupee.
• Internationalisation of Indian Payment Infrastructure: India has expanded the international footprint of its domestic payment systems, particularly UPI, facilitating cross-border payments and strengthening the infrastructure required for wider use of INR.
  • India’s Unified Payments Interface (UPI) is officially accepted in several countries including Maldives, Mauritius, Nepal, Qatar, Singapore etc.
• Special Rupee Vostro Account (SRVA): To encourage greater use of the Indian Rupee (INR) in international trade, the RBI introduced an additional arrangement in July 2022 for invoicing, payment and settlement of exports and imports in INR through Special Rupee Vostro Accounts (SRVAs).
• Bilateral Currency Swap Arrangements: India has Currency Swap Agreement with SAARC, UAE, BRICS, etc.
• INR-denominated Cross-border Lending: Banks in India and their overseas branches have been permitted to lend in Indian Rupees to persons resident in Bhutan, Nepal and Sri Lanka to facilitate cross-border trade transactions, thereby promoting wider international use of the rupee.