Take It Slow: Internationalisation Of The Rupee

The internationalisation of the Indian Rupee (INR) is a topic that has garnered significant attention in recent times. The Reserve Bank of India (RBI), through an Inter-Departmental Group (IDG) report, has recently shed light on its views on the roadmap to internationalise the INR.  The report highlights the evolving international monetary and financial system, characterised by a shift towards multipolarity, as evidenced by changes in foreign exchange reserves, trade invoicing, and regional economic cooperation agreements.

There is a growing acceptance and integration of various currencies into the international monetary system. The increasing adoption of alternative currencies for trade invoicing and settlement is another significant development. As countries seek to mitigate currency risks and enhance economic cooperation, they are embracing diversified payment mechanisms beyond the traditionally dominant currencies. Bilateral and regional economic cooperation agreements further underscore the evolving nature of the international monetary system. Countries are forging closer ties through cooperative frameworks that promote trade, investment, and financial integration. 

India, with its robust economy and expanding global presence, stands well-positioned to seize the opportunities arising from the changing international monetary landscape. In the present context, the shifting power dynamics influenced by China’s rise and geopolitical developments have stimulated discussions about reducing the dominance of the US dollar and embracing a multipolar currency system. As the IDG report highlights, India’s proactive steps towards internationalising the INR align with the broader trend of embracing a multipolar system. By gradually diversifying its currency usage, promoting the INR for international trade, and strengthening financial cooperation with partner nations, India can enhance its economic influence and contribute to a more balanced and inclusive global monetary system.

Economy rules

A significant prerequisite for the internationalisation of a currency is the real and deeper internationalisation of a nation’s economy as a key start. India has demonstrated remarkable progress since its economic liberalisation in 1991. Over the years, the country has experienced substantial growth, increased participation in global trade, and attracted significant foreign direct investment. These developments have laid a solid foundation for India to consider the internationalisation of the Indian Rupee (INR) and further integrate its economy into the global arena. 

The internationalisation of the Indian rupee refers to its increased usage in international trade and cross-border transactions. It is a process that involves the use of a currency for more and more cross-border transactions. For the rupee, it means that more and more international payments start taking place in the Indian currency. This involves promoting the rupee for current account transactions and foreign trade.

Merely using the Indian currency for payments and purchases in foreign countries does not signify full internationalisation. The RBI has taken steps towards facilitating international transactions in the rupee by granting permission to banks from 18 countries, including the UK, Russia, Germany, Singapore, and Israel to settle payments in the rupee. Furthermore, over 60 countries have expressed their interest in conducting trade with India using the rupee as the preferred currency. 

The question of whether India should internationalise its currency, the Indian Rupee (INR), has been a subject of debate for quite some time. While some argue for swift action, advocating for the immediate convertibility of the INR, a cautious approach that prioritises stability and sustainable growth seems more prudent. 

Achieving full convertibility of the Indian Rupee (INR) involves enabling its unrestricted trading in international currency markets, requiring further currency settlement mechanisms and a robust forex market. While this move offers benefits such as increased liquidity and reduced transaction costs, it also exposes the currency to speculative pressures and volatile movements. Achieving full convertibility necessitates unrestricted cross-border fund transfers and opening up the INR for capital accounts, reducing currency risks for Indian businesses, minimizing the need for foreign reserves, enhancing India's resilience to external shocks, and providing higher bargaining power in international markets.

India's balance of trade, characterized by a trade deficit with multiple nations, plays a pivotal role in the internationalisation of the INR. The need to address this trade imbalance is paramount before considering full currency convertibility, as it directly impacts the value and stability of the currency. Given India's extensive foreign trade market, with a substantial reliance on imports and exports, the internationalization of the INR necessitates the development of a robust infrastructure, including well-established financial institutions and regulatory frameworks, to ensure smooth and efficient transactions. It is crucial to approach this process with caution and allow sufficient time for building the necessary infrastructure to mitigate operational inefficiencies and risks.

India's digital economy has witnessed significant growth, revolutionising domestic and international business through e-commerce, digital payments, and fintech advancements. As the INR gradually internationalises, it is crucial to consider the evolving digital landscape and ensure compatibility with emerging technologies and payment systems. However, it is important to acknowledge that currency internationalisation often carries geopolitical implications, potentially affecting India's relationships with countries that possess competing currencies or geopolitical interests. Navigating these complexities diligently is paramount to safeguarding India's economic sovereignty and stability.

The IDG report outlines a comprehensive roadmap for the internationalisation of the INR, prioritising short-term and medium-term measures. In the short term, the focus is on promoting private usage of the INR in trade and finance, integrating India's financial and payment markets with global counterparts, and establishing local currency settlement frameworks. Medium-term measures include harmonising taxes to facilitate fundraising within and outside India and enabling Indian banks to utilise the INR in offshore branches. Drawing insights from the journey of other currencies like the Chinese renminbi, the report emphasises the significance of a gradual approach to internationalization. India can progressively open its capital account while pursuing INR internationalisation, taking lessons from China's experience. 

The bottom line is the unsaid. IDG’s opinion that internationalisation is a "process rather than an event" is probably RBI-speak to mean “surely not for now”.

Dr. Srinath Sridharan - Author, Policy Researcher & Corporate advisor

Twitter : @ssmumbai