Internationalisation of the Indian Rupee: Significance, Challenges, and Way Forward
- GS Paper-3: Economy – forex, markets, external sector, currency reforms
- GS Paper-2: IR & global trade, de-dollarisation, multi-currency regime
- Prelims: Currency convertibility, RBI policies, Masala Bonds, UPI internationalization
- Essay/Interview: India’s economic diplomacy, rupee internationalisation strategy
Introduction
Currency internationalisation is the process whereby a national currency transitions from being used primarily for domestic transactions to a role in the global financial and trade system. Countries aim to globalise their currency to reduce reliance on foreign currencies, enhance economic sovereignty, facilitate global trade, decrease transaction costs, and boost geopolitical prestige. The US Dollar (USD), Euro, and more recently the Chinese Yuan (CNY), are leading examples of currencies with significant international utility. The growing global stature of the Indian economy has sparked enhanced interest in the Indian Rupee (INR) as a candidate for internationalisation.
What is Internationalisation of Rupee?
- Definition: Internationalisation of the rupee refers to enabling its use in cross-border trade, investment transactions, central bank reserves, and banking operations by non-residents.
- Key Currency Roles:
- Trade Currency: Used for invoicing and settlement of cross-border goods/services exchanges.
- Investment Currency: Used for foreign investment in local securities (stocks, bonds, etc.).
- Reserve Currency: Held by foreign central banks/governments as part of their foreign exchange reserves.
The internationalisation concept centers on expanding INR’s utility in global payment systems and economic transactions, moving beyond its traditional domestic boundary.
Current Status of INR
- Limited International Use: The rupee’s international use is restricted to certain regional partners and limited global transactions.
- INR Trade Invoicing: India has implemented rupee settlement with select partners (e.g., Russia, Nepal, Bhutan, Sri Lanka, Malaysia).
- Indian Banks Overseas: Indian banks in global hubs facilitate trade finance and rupee settlements.
- Vostro Accounts: Special Rupee Vostro Accounts (SRVA) created for partner country banks for direct rupee-based settlement.
- Rupee Settlement Mechanism: RBI now allows authorized dealer banks to use INR for settlement in export/import transactions and has signed MoUs for local currency trade with several Asian and BRICS nations.
Why India Wants to Internationalise the Rupee
- Reduce Dependence on USD: Decreasing reliance on the US dollar for international transactions shields India from global dollar shortages, sanctions, and forex volatility.
- Strengthen Economic Sovereignty: Control over currency reduces vulnerability to foreign monetary policies/dollar cycles.
- Lower Forex Volatility: Promotes rupee stability amidst global market fluctuations.
- Support Trade Ambitions: Facilitates India’s expanding trade corridor, especially with emerging markets (Asia, Africa, South America).
- Reduce Transaction Costs: Eliminates need for multiple conversions; benefits Indian exporters/importers by lowering cost and risk.
Benefits of Rupee Internationalisation
- Trade Efficiency: Energy, commodities, and defense contracts settled in INR can reduce payment delays, lower cost, and enhance trade ties.
- Global Presence: Indian banks and payment platforms (e.g., UPI) gain wider acceptance, increasing India’s economic footprint.
- Financial Markets Boost: Global investors can directly invest in rupee assets, deepening capital markets and liquidity.
- Currency Stability: Higher global rupee demand can dampen volatility and speculative attacks.
- Geopolitical Influence: INR internationalisation enhances India’s strategic autonomy and bargaining power in global platforms.
Challenges
- Limited Convertibility: INR is only partially convertible; capital account is restricted, impeding free movement of funds globally.
- Shallow Bond Markets: Deep, liquid financial markets are prerequisite for reserve currency status.
- Volatility Concerns: High rupee volatility, relative to USD/EUR, deters adoption for global transactions.
- Trade Deficit & External Vulnerabilities: Persistent deficits create pressure/weakness against global currencies.
- Competition: USD, Euro, and Yuan are far ahead due to their deep market integration, global acceptance, and policy consistency.
- Domestic Financial Reforms: India needs broader reforms in forex, banking, and regulatory regime.
Government & RBI Steps
- Rupee Settlement for International Trade: Over 22 countries signed agreements for rupee invoicing and settlement. SRVAs allow partner banks to transact directly in INR.
- Masala Bonds: Companies issue rupee-denominated bonds abroad, expanding INR’s use beyond domestic financing.
- UPI Globalisation: Unified Payments Interface now enabled in UAE, Singapore, Nepal, Sri Lanka, France, Mauritius; boosts Indian fintech presence.
- GIFT-IFSC Initiatives: Gujarat International Finance Tec-City enables rupee-linked global financial transactions and derivatives.
- Bilateral Currency Arrangements: Currency swap agreements with BRICS, SAARC, UAE, Maldives, and Indonesia.
- SRVA Use Expansion: RBI allows SRVAs to invest in Indian corporate bonds and commercial paper, improving liquidity.
- Transparent Reference Rates: Financial Benchmarks India Limited (FBIL) publishes INR rates against major currencies, improving trade efficiency.
- Cross-Border Lending: Indian banks permitted to lend in INR to non-residents in Bhutan, Nepal, Sri Lanka for trade/finance.
Key International Developments
- Momentum Post Russia-Ukraine Sanctions: Global push for de-dollarisation led to renewed rupee trade attempts, especially with Russia and South Asian neighbors.
- India-Russia Rupee Trade: Joint action for rupee-based oil and defense trade faced initial challenges but established payment infrastructure (SRVAs).
- BRICS Dialogue: Increased advocacy for local currency trade settlement among BRICS, debates on a potential currency basket.
- Asian Cooperation: Expansion of bilateral rupee settlement with Asian countries seeking alternatives to the dollar, especially amid recent sanctions and financial instability.
What Needs to Be Done (Way Forward)
- Deepen Forex Markets: Improve depth and liquidity of rupee forex and bond markets through regulatory reforms.
- Greater Financial Sector Reforms: Liberalize capital account, improve domestic financial infrastructure, resolve regulatory hurdles.
- Fiscal Discipline & Inflation Control: Maintain macroeconomic stability to improve investor confidence in INR.
- Expand Global Banking Presence: Broaden Indian banks’ presence in global financial centers for easy rupee settlements.
- Encourage INR Trade Invoicing: Offer incentives and develop support policy for INR invoicing in international exports/imports.
- Boost Exports & Domestic Capacity: Robust exports enhance credibility and demand for INR globally.
Comparison: INR vs USD/Yuan in International Use
| Currency | INR | USD | Yuan (CNY) |
|---|---|---|---|
| Role in Trade | Limited, growing among Asian partners | Dominant, widely used globally | Expanding, strong in regional trade |
| Role in Investment | Not major, lacks full convertibility | Major global currency for investment | Growing via policy push, managed float |
| Role as Reserve Currency | Minimal, used by few countries | World’s largest reserve currency | IMF SDR basket; increasing adoption |
| Bond Market Depth | Shallow, improving | Deep, highly liquid markets | Expanding, managed by state regulation |
| Capital Account Convertibility | Partial | Full | Partial (managed float) |
Latest INR Stats & Definitions
- INR/USD rate (Nov 2025): USD/INR at 88.55
- SRVAs (Special Rupee Vostro Accounts): Over 22 operational globally
- UPI now integrated in 7 countries for cross-border payments
- Masala Bonds: Rupee-denominated bonds for overseas investors
Definition:
Vostro Account: An account held by a foreign bank with an Indian bank, used to facilitate INR-based settlements for trade and investment.
RBI References & PYQ Lens
- RBI’s Internationalisation Measures: Cross-border lending, currency swap agreements, transparent reference rates, SRVAs, UPI expansion.
- PYQ Example: “Discuss the significance of currency internationalisation for economic sovereignty in India.” (UPSC GS-3, 2023)
Prelims-type MCQs
-
What is a Special Rupee Vostro Account (SRVA)?
a) An account held by an Indian exporter overseas
b) An account held by a foreign bank with an Indian bank
c) An RBI monetary policy instrument
d) An Indian government bond -
INR is not considered a full reserve currency because:
a) India has a trade surplus
b) INR has limited convertibility and shallow global bond markets
c) INR is not accepted for domestic transactions
d) INR is dollar-pegged -
Which payment system is being internationalised by India for cross-border transactions?
a) RTGS
b) NEFT
c) UPI
d) SWIFT -
Masala Bonds refer to:
a) INR-denominated bonds issued abroad
b) Bonds issued only in domestic markets
c) Government bonds for MSMEs
d) Convertible foreign bonds
Conclusion
Internationalisation of the Indian Rupee is an essential ambition supporting India’s aspiration to be a major global economy. Progress demands balanced reforms, macroeconomic stability, trust-building, deeper financial markets, and greater global engagement of Indian banks and payment systems. A gradual, well-calibrated INR globalisation can drive India’s economic diplomacy, reduce dollar risk, and amplify its influence in a multipolar global order.
