Global trade is witnessing a shift as countries look for alternatives to the US dollar due to rising geopolitical risks. In this environment, India is pushing for the internationalization of the Rupee to reduce dollar dependence and strengthen economic sovereignty.

About Internationalization of Rupee

• Definition: Internationalization of the Rupee means that countries other than India use the Rupee for their trade and investment.
• Current Limitation: At present, India must convert Rupees into dollars or euros to trade with partners like Germany.
• Aspirational Goal: The goal is for the Rupee to achieve a global status where two foreign countries could settle trade in Rupees.
• Key Requirement: For the Rupee to gain global status, India must deepen trade ties; merely changing rules is not enough.

Need For Internalizing Of Rupee

• Dollar Weaponization: The Russia-Ukraine conflict showed how the US and Europe used the dollar as a geopolitical tool by imposing sanctions.
• Sanctions and Global Concerns: Freezing Russia’s dollar reserves and cutting it off from SWIFT made other countries fear similar treatment.
• Shift Toward Local Currencies: Global institutions such as International Finance Corporation (IFC), Asian Development Bank (ADB) are increasingly lending in local currencies, signalling a gradual retreat from dollar dominance.

Hard Currency and RBI Efforts

• Refers: Hard currencies (USD, Euro, Yen) are globally trusted and stable; India aims for the Rupee to join this elite group.
• RBI Measures to Promote the Rupee:
  • Rupee Invoicing:  Exporters can bill in Rupees instead of dollars.
  • Rupee Settlement:  Payments can be accepted in Rupees, reducing reliance on hard currencies.
  • Rupee Loans to Neighbours: Indian banks can issue cross-border trade loans in Rupees to Nepal, Bhutan, and Sri Lanka.

The India–Russia Vostro Account Failure

• Trade Surge: India-Russia trade jumped from $1.5B (2003) to $72B (2023), driven mostly by cheap oil.
• Rupee Settlement Attempt: India created Vostro Accounts for Russia to settle trade in Rupees.
• Reasons For its Failure: Russia refused to accept Rupees, instead demanding Yuan, Ruble, or Dirham.
• Core Problem: Russia accumulated large Rupee balances but had no use for them due to limited Indian exports that Russia wanted.

Barriers To Internalization Of Rupee

• Trade Structure Imbalance: 80% of the trade is crude oil and coal, with almost no intra-industry trade. 
• Unawareness Gap among MSMEs: Many small exporters prefer dollars and are unaware that the Rupee trade is possible.
  • The Reserve Bank of India (RBI) and the Federation of Indian Export Organisations (FIEO) must conduct awareness campaigns to educate exporters about Rupee-based trade options.

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Way Forward

• Diversify Trade: Trade needs to diversify into higher-value goods and balanced two-way exchanges to make Rupee settlement viable.
• Domestic Messaging System (SFMS): India is developing the Structured Financial Messaging System (SFMS) to reduce dependence on the Western-controlled SWIFT system and should encourage partners like the UAE to use it.
• Local Currency Agreements: India is signing bilateral pacts with countries like UAE, Indonesia, and Sri Lanka to settle trade in Rupee or Dirham.
• UPI Globalisation: India is linking UPI with systems like Singapore’s PayNow and expanding into Europe, reducing dollar conversion costs for tourism and remittances.
• BRICS Opportunity: With India chairing BRICS next year, there is a major opportunity to push for a common local currency settlement framework among BRICS nations.

Conclusion

The goal is to support Viksit Bharat 2047 and achieve $1 trillion in merchandise exports by 2030. The local currency trade reduces trade costs and improves ease of doing business.

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