The Reserve Bank of India (RBI), like its global peers, is a cautious, conservative central bank. So, it comes as a surprise that in recent months the RBI has been talking up the internationalization of the rupee, that is the cross-border use of the currency for trade settlements and swap arrangements with several countries.
The central bank has allowed Indian banks to lend in rupees to countries in the neighborhood and is actively promoting trade invoicing in the national currency. Recent agreements with Singapore, Russia and the UAE have widened rupee settlement options and foreign banks have been permitted to open vostro accounts, which will allow the foreign entity to hold rupee-denominated accounts with domestic banks.
The gradual internationalization of the rupee is taking place against a background of trade volatility and tensions with America, the country’s largest trading partner. The rupee has weakened in recent weeks as the Trump administration imposed prohibitive 50% tariffs on exports from India, which is likely to have a tangible, negative impact on the economy.
What gives? For a start, the notion of a global rupee is not as far-fetched as it seems. A little known historic fact is that the rupee was the official currency during much of the 1950s and 1960s in the Gulf states of the UAE, Oman, Kuwait, and Qatar. It remains legal tender in Bhutan and is widely accepted in Nepal. The use of the “Gulf rupee” was at a time when the country was significantly weaker compared with its position today as one of the world’s fastest growing large economies. It can also be argued that there is a distinct “Indospheric” economic zone, both within South Asia, and further afield in the Middle East and Africa, where use of the currency in international transactions is only going to grow.
While not in the same league as China and East Asian neighbors, India is a sizeable trading power with exports and imports totaling over $1 trillion last year. Even if a modest percentage of this trade is denominated in rupees, it will benefit Indian importers (by reducing foreign exchange risks) and incentivize counter-parties to buy more Indian goods and services. This is a playbook which China has deployed over the past decade to internationalize the renminbi, including the establishment of a cross-border interbank payment system (CIPS).
India, like China, is also unlikely to relax capital controls anytime soon and float the rupee. However, it is useful to differentiate between the India and China approach. RBI Governor Sanjay Malhotra has emphasized that rupee internationalization is not aimed at supplanting the dollar as the world’s reserve currency, an ambition which China definitely harbors. India has also spoken out against a Russian-Chinese proposal to launch a BRICS currency.
India could emulate China in other ways. Like China’s UnionPay, it could further expand the cross-border use of its RuPay card platform, which will allow Indians traveling overseas to pay for products and services in rupees. Over time, as the global rupee gains credibility and influence, it could even find a place on the IMF’s Special Drawing Rights (SDR) currency basket, which currently includes the renminbi alongside the dollar, the pound, euro, and the yen. For hyper cautious RBI, that may well be the ultimate prize.
