Imagine travelling to a foreign country and transacting in the Indian Rupee. This day may not be very far as the Indian government is taking initiatives to make the rupee global or internationalize it. The efforts to promote the Indian rupee globally started in July 2023 when India made its first payment in its domestic currency for crude oil acquired from the United Arab Emirates. The US dollar has been the default payment currency for the import of crude oil for ages. However, the negotiation terms are changing. India also paid for Russian oil in rupees, a transaction aided by the fact that India did have the upper hand in negotiations, given the geopolitical climate. 

But while Crude is India's biggest bill, the country's ambitions for the rupee are not limited to paying oil bills in the domestic currency but to using it across all international transactions. The objective is to eliminate the need for currency conversions, reduce the FOREX load, and simplify transactions.

Prime Minister Narendra Modi, speaking on the 90th anniversary of India's central bank, the Reserve Bank of India, said that India must work towards making the rupee more accessible and acceptable globally. Making the Indian Rupee acceptable in other parts of the world will make India economically more self-reliant. 

However, the internationalization of the rupee is more than just an inventive political slogan that's been paid lip service at speeches or housed in a blueprint stage for decades. The government has taken actionable steps to realize its ambition. For one, the RBI, the Indian government and the central bank are considering promoting the rupee in Thailand, a favoured destination for Indian tourists and businesses. RBI has asked banks to share their insights and expectations regarding transactions associated with Thailand. The currency agreement could gradually contribute to developing a currency market in foreign countries. 

The implications for India

Greater international acceptance of the domestic currency could decrease the demand for traditional reserve currencies such as the dollar and euro. Many bankers and economists think that when the RBI intervenes in the market to keep the rupee stable, they want more people to use it for international trade. They believe that if the rupee is seen as less likely to change in value, more businesses will use it to make payments across borders.

The internationalization of the rupee could lower the currency risk for Indian businesses by shielding them from sudden changes in currency values. It will also decrease the necessity to hold foreign reserves, making India less vulnerable to unexpected external events. Additionally, it will give India more leverage in negotiations in global markets. 

How to get there?

However, completing internationalization will call for some operative and legislative changes in the current system. It will require a further opening up of currency settlement processes and the establishment of a robust currency swap and forex market. It would call for unrestricted cross-border fund transfers and full convertibility of the currency. Currently, India permits full convertibility only on current accounts. To make the rupee globally acceptable would also entail opening it up for capital accounts.

Internationalizing the Indian rupee can contribute to India's long-term economic growth, stability, and global standing, attracting foreign investors who may find it more convenient to invest and trade in India using the local currency.

 

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This Article has been prepared by Kotak Mahindra Asset Management (Singapore) Pte. Ltd.