Internationalisation of Rupee

Context:

Global shifts in geopolitics, rising de-dollarisation efforts, and disruptions in dollar-dominated payment systems have pushed many countries — especially in the Global South — to explore trade settlement in local currencies. In this backdrop, India is trying to internationalise the rupee to reduce dependence on the US dollar, lower transaction risks, and strengthen its economic sovereignty. Recent RBI initiatives, growing bilateral trade, and expansion of systems like UPI/Open banking globally have revived the debate on how deeper trade ties and modern payment architecture can accelerate the global use of INR.

UPSC Relevance:

Economy

UPSC PYQ:

Q. Convertibility of rupee implies (2015)

(a) being able to convert rupee notes into gold  
(b) allowing the value of rupee to be fixed by market forces  
(c) freely permitting the conversion of rupee to other currencies and vice versa  
(d) developing an international market for currencies in India  

About Internationalisation of Rupee:

The Indian Rupee currently accounts for approximately 1% of global foreign exchange turnover. It has a smaller market size across most trading instruments when compared to the top 8 emerging market currencies.

Internationalization of Rupee refers to a process that involves increasing the use of the rupee in cross-border transactions. 

What is Internationalisation of currency:

According to Kenen (2011), an international currency is one that is used and held beyond the borders of the issuing country, not merely for transactions with that country’s residents but also, and importantly, for transactions between non-residents.

Kenen (2011) also enumerates the process of internationalisation of a currency including
the necessary preconditions. They are as follows:

• The government must remove all restrictions on the freedom of any entity, domestic or foreign, to buy or sell its country’s currency, whether in the spot or forward market.
• The currency may be included in the “currency baskets” of other countries, which they use in governing their own exchange rate policies
• Domestic firms are able to invoice some, if not all, of their exports in their country’s currency, and foreign firms are likewise able to invoice their exports in that country’s currency, whether to the country itself or to third countries.
• Foreign firms, financial institutions, official institutions and individuals are able to hold the country’s currency and financial instruments denominated in it, in amounts that they deem useful and prudent
• Foreign firms and financial institutions, including official institutions, are able to issue marketable instruments in the country’s currency
• The issuing country’s own financial institutions and non-financial firms are able to issue on foreign markets instruments denominated in their country’s own currency
• International financial institutions, such as the World Bank and regional development banks, are able to issue debt instruments in a country’s market and to use its currency in their financial operations.

Benefits:

• Lower Vulnerability: Reduces dependence on the dollar and protects the economy from sudden exchange-rate shocks and imported inflation.
• Reduced Currency Risk: Minimises volatility-related losses, lowering business costs and supporting global expansion of Indian firms.
• Lower Forex Reserve Pressure: Cuts the need to maintain very large foreign exchange reserves for external stability.
• Easier Deficit Financing: If INR gains global acceptance, India can borrow abroad in its own currency, reducing fiscal and exchange-rate risks.
• Stronger Financial Markets: Higher global demand for INR boosts foreign investment in Indian bonds and equity, deepening India’s financial markets.

Steps taken by GOI:

• UPI is adopted in Singapore, France, UAE, Sri-Lanka, Bhutan, Mauritius, Nepal etc.
• RBI 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.
• In its Annual Report for 2023-24, the RBI unveiled a Strategic Action Plan for 2024-25 aimed at promoting the internationalization of INR.
• Rupee Dominated Masala Bond
• Special Vostro Rupee Accounts
• Currency Swap Agreements: Singed with more than 20 countries it facilitates liquidity support and trade settlement in local currencies.

PDF