The Indian rupee (INR) is gaining momentum as an international currency, with an increasing number of countries opting to trade in INR instead of the US dollar. This is a significant development for India’s economy, as it reduces dependency on foreign exchange reserves, lowers transaction costs, and boosts exports.

Growing Acceptance of INR

According to the latest data from the Reserve Bank of India (RBI), 18 countries have agreed to trade in INR, and 60 special rupee vostro accounts (SRVAs) have been opened by domestic and foreign banks for this purpose. These accounts allow banks from partner countries to hold and transact in INR with Indian banks.

The SRVA initiative started in July last year when the RBI issued detailed guidelines on cross-border trade transactions in INR. SRVA holders are permitted to invest surplus balances in Indian government securities, a facility provided by the RBI to popularize this new arrangement.

Countries Trading in INR

The 18 countries that have agreed to trade in INR are:

• Russia
• Singapore
• Sri Lanka
• Botswana
• Fiji
• Germany
• Guyana
• Israel
• Kenya
• Malaysia
• Mauritius
• Myanmar
• New Zealand
• Oman
• Seychelles
• Tanzania
• Uganda
• United Kingdom

Among these, Russia has been a vocal supporter of de-dollarization and has expressed interest in facilitating trade in local currencies with India. India and Russia have already signed a memorandum of understanding (MoU) to use their national currencies for bilateral trade.

Another major trading partner, the UAE, is in talks with India to settle trade in rupee-dirham instead of the US dollar. This would be a huge boost for India-UAE trade relations, which stood at $73 billion in FY 2022. India and the UAE also signed a free trade agreement (FTA) last year, enhancing economic cooperation and market access.

Benefits of Trading in INR

Trading in INR offers multiple benefits for India:

1. Reduced Exposure to Exchange Rate Fluctuations: This minimizes currency risks, positively impacting the profitability and competitiveness of exporters and importers.
2. Lower Transaction Costs: Eliminating the need for currency conversion fees and commissions to intermediaries.
3. Increased Demand and Liquidity of INR: Strengthening the value and stability of the INR in the global market.
4. Enhanced Economic Sovereignty: Reducing reliance on foreign currencies and reserves.

India’s Vision for a Self-Reliant Economy

Promoting trade in local currency aligns with India’s vision of becoming a self-reliant and resilient economy. By leveraging domestic capabilities and resources, India can create more opportunities for growth and development.

Steps Towards Internationalization

To become a global currency, a stable economy, well-developed financial markets, and international investor confidence are crucial. While India is one of the largest economies globally, the INR faces challenges in achieving global currency status. These challenges include exchange rate volatility, restrictions on capital flows, and limitations on currency convertibility.

India has taken steps to promote the rupee’s internationalization. The RBI has been gradually liberalizing capital controls and implementing measures to deepen financial markets. The introduction of rupee-denominated bonds, known as “Masala bonds,” is one such initiative to attract foreign investors.

The Path Ahead

Currency internationalization is a complex process that takes time and involves various economic and policy factors. The Indian rupee’s global presence and recognition are not yet comparable to major reserve currencies, but India is working towards increasing its prominence in international markets. The RBI, despite promoting rupee-based trade, is still reluctant to allow full convertibility due to fears of capital flight and unpredictable exchange shocks.

Challenges and Future Prospects

The move towards trading in INR is a welcome step for India’s economy, reflecting its growing stature and influence globally. As more countries join the bandwagon of trading in INR, India can expect to reap more benefits and advantages from its international trade relations.

However, the trade volume in INR is yet to be encouraging. A recent Bloomberg report indicated that India’s push for a rupee payment mechanism is facing challenges due to a growing trade gap with Russia. Russian banks have not initiated any payments in the Indian currency yet, as they do not want a pile-up of rupees. The market share of trades in INR will depend on the strength and stability of the INR, expansion of the capital market, and acceptance of INR by third countries for their trade settlements.

Conclusion

For the Indian rupee to be accepted as an international currency, it has a long journey ahead through uncharted territory. India should undertake studies and create mechanisms to understand the dynamics of this transition and take gradual but sure steps towards achieving this goal. Despite the current challenges, the increasing international use of the INR marks a significant step towards enhancing India’s economic influence and stability in the global market.