India wants the rupee to become a worldwide currency. The Reserve Bank of India’s (RBI) inter-departmental group (IDG) said on 5th July 2023 that with India remaining one of the fastest-growing countries and demonstrating outstanding resilience in the face of major obstacles the rupee has the potential to evolve into an internationalized currency. As the official currency of India, one of the largest economies in the world, the Indian rupee (INR) plays a key role in the global economy. The Indian government and financial institutions have been working to strengthen the rupee’s position and acceptance on the world scene, and there has been an increase in interest in the rupee’s internationalization in recent years. This blog examines the advancements achieved toward the internationalization of the Indian rupee, as well as its advantages, difficulties, and future prospects.

The Reserve Bank of India (RBI) and the Indian government have made major efforts over the past ten years to encourage the internationalization of the Indian rupee. Some noteworthy efforts include:

• Capital controls liberalization: The Indian government has gradually loosened capital restrictions, making it easier for cross-border commerce, investments, and remittances. As a result, international investors are now more inclined to invest in India’s financial markets.
• Expansion of currency derivatives: The RBI has permitted the introduction of currency futures and options priced in rupees, allowing players to effectively hedge their currency risks. These actions have increased the rupee’s appeal to foreign investors.
• Bilateral currency swap agreements: In order to facilitate bilateral trade and investment settlements in local currencies, the RBI has inked a number of currency swap agreements with foreign central banks. These agreements encourage the usage of the rupee and lessen reliance on other currencies like the US dollar.

Advantages

For India and its economy, the internationalization of the Indian rupee has various advantages:

• lessening of currency risk: As the rupee becomes more widely accepted, Indian companies that engage in foreign commerce may make transactions in their own currency, lowering the risks and expenses associated with currency conversion.
• Increasing foreign investment: A more widely accepted and readily convertible rupee can draw more foreign investment, which will promote economic expansion.
• Improved economic ties: The internationalization of the rupee has the potential to improve India’s bilateral trading ties with other nations, especially those in South Asia, the Middle East, and Africa.
• Reserve diversification: As the rupee acquires worldwide acceptance, central banks and sovereign wealth funds could think about owning assets denominated in Indian rupees, therefore diversifying their reserve holdings and enhancing India’s financial position.

These ideas are relevant in view of the US economic sanctions placed on Russia for invading Ukraine, as well as the rising call for an alternative to the US currency for international commerce.

The process of expanding the usage of the rupee in cross-border commerce is known as internationalization. In other words, A currency is said to be “internationalized” when its use and acceptability are expanded beyond its national borders. It entails enabling a currency’s usage in international trade, investment, and financial transactions by increasing a currency’s degree of freedom of convertible. The main goal is to advance the currency’s standing to that of an important trading currency or a global reserve currency.

It entails pushing the rupee for import and export commerce, next for other current account operations, and finally for capital account activities. These are all transactions between Indian residents and non-residents. The internationalization of the currency, which is inextricably related to the nation’s economic success, necessitates greater opening up of the currency settlement system as well as a robust swap and foreign exchange market.

More critically, it will necessitate complete capital account convertibility and unrestricted cross-border financial transfers. As of today, India allows only 100% convertibility on the current account.

The scale of the US economy, the scope of its trade and financial networks, the depth and liquidity of the US financial markets, and a track record of macroeconomic stability and currency convertibility all reinforce the dollar’s position. The absence of workable substitutes has also aided the dollar’s supremacy.

The working group of the RBI believes that the Chinese Renminbi is the most direct rival to the US dollar as the world’s reserve currency. The ability of the Chinese economy and its financial system to exhibit the same long-term resilience, integrity, transparency, openness, and stability that are characteristics of the US economy will determine whether it can compete with the US dollar in the future.

Obstacles And The Future

While there has been substantial progress, there are still a number of obstacles in the way of the Indian rupee’s complete internationalization.

• Economic stability: The confidence of foreign investors and the wider acceptability of the rupee are greatly influenced by the health of the Indian economy, the management of inflation, and fiscal restraint.
• Financial infrastructure: To ensure smooth cross-border transactions in the rupee, India’s financial infrastructure, particularly its payment systems, settlement processes, and clearing facilities, must be strengthened.
• Market depth and liquidity: The standing of the rupee would be enhanced by a deeper and more liquid market for rupee-denominated products, such as bonds and derivatives.
• Global perception: It is essential to dispel misconceptions about India’s regulatory framework, geopolitical concerns, and currency volatility in order to establish the rupee’s credibility as a safe and trustworthy currency.