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The Reserve Bank of India's inter-departmental group on Wednesday said that the Indian rupee has the potential to become an "internationalised" currency. This comes when several countries are scrambling to find an alternative to the US dollar in international transactions in the light of sanctions on Russia for the war in Ukraine.
But what does the "internationalisation" of the rupee mean?
Internationalisation is a process that involves the use of a currency for more and more cross-border transactions. For the rupee, it means that more and more international payments start taking place in the Indian currency.
This involves promoting the rupee for current account transactions and foreign trade.
These transactions will have to take place between resident and non-resident Indians.
What does the internationalisation of the rupee require?
This requires a further opening up of the currency settlement and a strong currency swap and forex market.
It would also require full convertibility of the currency and a restriction-free cross-border transfer of funds. India only allows full convertibility on current accounts. To make the rupee more international, it will also have to open it for capital accounts.
Currently, the US dollar, the Euro, the Japanese yen and the pound sterling are the leading reserve currencies in the world.
China is also trying to make its currency renminbi more international but has had limited success so far.
The dominance of the US dollar
The US dollar enjoys the highest privilege among all currencies in the world. It is used in most global transactions. This is mainly due to the size of the US economy, the reach of its financial networks and the depth and liquidity of its financial markets.
Importantly, the dollar's dominance can also be credited to the lack of good alternatives.
The RBI's working group said that the "obvious" challenger to the US dollar is the Chinese renminbi. However, it will depend on how the trade war between the two countries pans out.
Also, the resilience of the Chinese financial system is yet to be tested in the long run.
What will happen with the internationalisation of the rupee?
This will reduce the currency risk of Indian businesses by protecting them against currency volatility. It will also reduce the need to maintain foreign reserves, making India more insulated from external shocks.
Moreover, it will also provide India with higher bargaining power in international markets.
Did you know?
Interestingly, the Indian rupee was the legal tender in the Gulf countries, including Kuwait, Bahrain, Qatar and UAE, till the early 1970s. In 1959, the Centre allowed the RBI to issue special notes only for the Gulf region. The currency had the same value as the Indian rupee and was known as the Gulf rupee or external rupee.
Moreover, Indians could also take the Indian rupee notes when they went on the Haj pilgrimage and exchange them freely for Saudi riyals. Later, the Centre introduced special notes for the pilgrimage with the word "HAJ" inscribed on it. These were called "Haj notes''.
The Indian currency, however, was devalued in 1966. This led to several countries in the Gulf withdrawing the use of the Gulf rupee. Gradually, by the early 1970s, all the countries stopped using the Gulf rupee as their currency.
How is internationalisation different from paying in rupee in foreign countries?
Internationalisation of the Indian rupee means the currency will be used mainly for international trade and cross-border payments. However, when the Indian currency is used to make payments and buy things in a foreign country, it does not signify "internationalisation".
The Reserve Bank of India (RBI) has allowed banks from 18 countries to settle payments in the rupee. This includes names like Sri Lanka, Israel, Russia, Germany, Singapore and the United Kingdom. Apart from this, 64 other countries have expressed their intent to trade with India in rupee.
