Rupee Internationalisation: Roadmap, Concerns and Way Forward
Why in the news
RBI Deputy Governor T. Rabi Sankar called rupee internationalisation a key pillar of India’s path to developed-economy status, as more exporters invoice cross-border trade in rupees.
What it means
- Make the rupee usable for cross-border deals, accepted for trade and investment, and eventually a reserve or settlement currency.
- Components: trade invoicing and settlement, cross-border payments, foreign investors buying rupee bonds and offshore rupee markets, and long-term reserve status.
- Gradual: trade first, wider capital flows later.
Global context
After the 2022 Russia-Ukraine war, the freezing of Russia’s dollar assets and its removal from SWIFT exposed the risk of leaning on a dollar-based system, so many countries, India included, looked for alternatives.
Roadmap and arrangements
| Element | Detail |
|---|---|
| Roadmap | IDG report, July 2023; 10 short, 5 medium, 1 long-term milestones |
| Policy push | 2024: Prime Minister wanted the rupee accessible and acceptable worldwide |
| Local Currency Arrangements | Central-bank pacts to settle in local currencies; MoUs since July 2023 with UAE, Indonesia, Maldives, Mauritius, more under discussion |
| Mechanism | Payments via Special Rupee Vostro Accounts (SRVA) |
| Benefits | Lower exchange-rate risk, less hard-currency dependence, financial sovereignty |
Concerns
- Volatility: speculative flows and offshore swings can hurt competitiveness and inflation.
- Forex reserves: quick conversion of rupee holdings in a crisis can strain reserves.
- Policy autonomy: foreign holdings limit interest-rate choices; links to the Impossible Trinity.
- Shallow markets: reserve currencies need deep bond markets and efficient capital markets.
- Capital account risk: opening too early invites speculative attacks, as in the 1997 Asian crisis; India follows a calibrated approach.
- Low demand: only about 5% of trade is settled in rupees.
- Geopolitics: de-dollarisation and SWIFT-bypassing systems may cause tension.
- Offshore distortions: NDF markets can sway domestic rates.
- SDR and CLS entry needs full convertibility, liquidity and stable macro fundamentals.
- Trade imbalance: one-sided trade makes holding rupees unattractive.
Way forward
- Deepen bond and forex markets; simplify FPI norms.
- Offshore ecosystem: rupee banking via offshore branches, rupee accounts for NRIs abroad, rupee loans for NRIs in Nepal, Bhutan and Sri Lanka.
- Link payment systems (RTGS, SFMS) with other countries to cut SWIFT dependence.
- Long-term goals: CLS inclusion (it settles 18 major currencies) and the IMF SDR basket.
Conclusion
It is a long, possibly decades-long process. Institutions such as LCAs, SRVAs, index inclusion of Indian bonds and offshore access show a structural shift, though rupee settlement remains small. It supports India’s aim of becoming a developed nation by 2047.
Exam angle
- Terms: SRVA, LCA, CLS, SDR, NDF, Impossible Trinity.
- Numbers: 83 banks, 35 countries; 10-5-1 milestones; about 5% of trade.