With India’s growing stature in the comity of nations and the expansion of its trade far and wide, it is not surprising that the country is making appreciable moves to make the rupee an international currency. In view of many nations working towards the de-dollarization of global trade, this is the right time for India to step up its efforts to position the rupee as an international currency for transactions.
Several countries have expressed an interest in conducting global trade in the rupee, and the central bank of the country, the Reserve Bank of India (RBI), has approved opening 60 Special Rupee Vostro Accounts (SRVAs) in 18 countries, including the UAE, Russia, New Zealand, the United Kingdom, Germany, Sri Lanka, and more.
Internationalisation of the rupee will involve increasing the use of the currency in cross-border transactions. Accordingly, the rupee will then be used as a medium for imports, exports, and other current- and capital-account transactions.
Preparations have already begun. In July 2022, the RBI issued detailed guidelines for cross-border trade transactions in the Indian rupee and the opening of SRVAs. Work is underway to make provisions for invoicing, payment, and settlement of exports/imports in the rupee. Authorised banks in India will need to open and maintain SRVAs of the partner trading countries’ banks. In order to popularize the new arrangement, RBI will allow SRVA holders to invest surplus balances in Indian government securities.
Who stands to gain?
The internationalization of the rupee will be a win-win situation for all the parties concerned. For starters, transactions will become simpler, as it is much easier to transact in the local currency than going to third-party currencies like the U.S. dollar or euro. Moreover, the transaction costs for both exporters and importers will be reduced, thus leading to savings.
Additionally, the move will reduce India’s dependence on foreign currency, making it less vulnerable to external shocks. The need for holding foreign exchange reserves will automatically be pared. This will be a huge advantage, as the RBI has already exhausted $114 billion of its reserves since September 2022, grappling with the rupee’s slide against the dollar. The use of the rupee in cross-border transactions will also mitigate currency risk for Indian businesses.
So, what’s the problem?
While internationalizing the rupee is sure to jazz up the Indian currency and accord prestige to the nation, there are some risks involved, and the stakeholders need to be cognizant of those. Internationalizing the rupee will make domestic monetary policy more challenging. For instance, non-resident holdings of the rupee could strain pass-through payments to domestic markets, increasing volatility within the country. Likewise, there are unforeseeable risks emanating from the policies of leading international currencies such as the dollar and euro.
As real as these risks are, playing too safe is clearly not an optimal choice. India has the talent to manage any ensuing problems with effective macroeconomic measures. The Indian rupee is on the cusp of becoming one of the global reserve currencies of the world. Given the upheaval caused by the Russia-Ukraine war and the resulting disruption to payment systems globally, this is the right time to insist on export settlements in the rupee. The stature of the Indian business community will rise, as will the country’s global heft. It is a risk worth the rewards.
