Trade in Indian Rupee
Kartavya Desk Staff
Syllabus: Economy: Liberalisation of Economy
- •Source: TH*
Context: India and Russia have significantly increased their rupee-rouble transactions in 2024, doubling them since the previous year despite U.S. and EU sanctions.
What does the data show?
• Trade Volume between India and Russia: Bilateral trade is already at $65 billion in 2023-24, with $60 billion from Russian exports to India, mainly in energy.
• Future Prospects: Trade target of $100 billion by 2030
• Banking Developments: Russia’s Sberbank reports a six-fold increase in corporate deposits in rupees since January.
What does internationalisation of the rupee mean?
Internationalisation of the rupee refers to expanding Rupee usage in international transactions between residents of India and non-residents. Initially focused on trade transactions like imports and exports, this process aims to gradually extend to other current account dealings and eventually capital account transactions. The rupee’s internationalisation seeks to reduce dependency on dominant global reserve currencies such as the US dollar, Euro, Japanese yen, and pound sterling.
Government steps towards Internationalization of the Indian Rupee:
• 1950s: Indian rupee was widely used in UAE, Kuwait, Bahrain, Oman, and Qatar as legal tender. However, the devaluation of the Indian rupee (in 1966) led these countries to introduce sovereign currencies, reducing reliance on the rupee.
• Establishment of the Asian Clearing Union (ACU) in 1974 by 10 Asian central banks: ACU facilitates multilateral trade transaction settlements among its 13 member countries.
• GIFT City Developments
• July 2022: RBI circular on “International Trade Settlement in Indian Rupees.” Introduction of external commercial borrowings in Rupees (Masala Bonds).
• March 2023: RBI introduced a mechanism for rupee trade settlement with 18 countries. Banks from these countries are authorized to open Special Vostro Rupee Accounts (SVRAs).
• July 2023: Agreement with UAE allowed Indian Oil Corporation to pay in rupees for crude. Similar rupee settlements for Russian oil imports
Advantages:
Benefit | Description
Reduced dependency on dollars | International use of rupee reduces overdependence on US dollar for India’s import payments, insulating from pricing fluctuations and political sanctions.
Currency stability | Greater global use can lead to more stability and confidence in the rupee, similar to historical examples with currencies like the pound sterling or Japanese Yen.
Lower transaction costs | International rupee invoicing and settlement should reduce transaction costs on bilateral trades settled in dollars or euros, saving on currency conversion.
Soft power and investor appeal | Wider adoption enhances India’s soft diplomacy, positioning it among emerging economies, and potentially boosting growth and investment appeal over the long term.
Macroeconomic discipline effect | Wider use encourages Indian policymakers to maintain stricter fiscal and monetary discipline, ensuring stability and signalling reliability to global markets.
Limitations of Internationalization of the Indian Rupee:
• Volatility of rupee: High volatility versus currencies like USD and low stability makes it less attractive globally for trade and investment flows. This impacts the feasibility of its wider adoption.
• Capital flight concerns: Opening up the rupee to international markets may lead to capital flight if investors lose confidence in the currency or anticipate unfavourable economic conditions. This can strain the country’s foreign exchange reserves.
• This can strain the country’s foreign exchange reserves.
• Limited capital account convertibility: Full capital account convertibility is needed to allow wider use in global capital flows. But India doesn’t have full capital account convertibility. Also, this is risky for India given past currency crises and high external debt.
• Underdeveloped corporate debt and securities markets: Deep, liquid debt and securities markets crucial to allow rupee serving reserve, trading currency purposes globally. Indian markets lack relative depth, especially in derivative instruments.
• High inflation history for rupee: Vulnerability to high inflation historically due to dependence on import of commodities like oil and gold. Risk of imported inflation through rupee internationalization due to exchange rate pass-through.
Way forward:
• Develop Deeper Domestic Bond Markets: Take policy steps to enable greater investment options for foreign investors and Indian trade partners in rupee-denominated securities to facilitate its global usage.
• Make the Rupee More Freely Convertible: Aim for full convertibility by 2060, allowing easier movement of financial investments between India and abroad.
• Streamline Trade Settlement Processes: Optimizing documentation and procedures for rupee-denominated settlement of export and import transactions would promote internationalization.
• Expand Bilateral Currency Swap Agreements: As undertaken with partners like Sri Lanka and Russia, allow settlement of bilateral trade and investment in rupee terms rather than intermediate reserve currencies.
• Offer Incentives for Rupee Usage: Provide tax and regulatory incentives to international businesses to invoice more transactions in Indian rupee.
• Ensure Macroeconomic Stability: Pursue fiscal prudence, low inflation for currency stability and predictable currency issuance procedures to build confidence in economic management.
• Implement Recommendations of Tarapore Committees: Work towards goals like reducing fiscal deficit below 3.5% of GDP and banking sector non-performing assets below 5% for stability.
Conclusion
The Tarapore Committee’s recommendations (1997, 2006) to reduce fiscal deficits, inflation rates, and banking non-performing assets are crucial steps towards rupee internationalization. Advocating for rupee as an official currency in international organizations would boost its profile and global acceptance
Insta Links:
• Internationalisation of rupee
Prelims Links:
Q1. Convertibility of rupee implies (UPSC 2015)
(a) being able to convert rupee notes into gold (b) allowing the value of rupee to be fixed by market forces (c) freely permitting the conversion of rupee to other currencies and vice versa (d) developing an international market for currencies in India
Ans: (c)
Q2. With reference to Balance of Payments, which of the following constitutes/ constitute the Current Account? (UPSC 2014)
• Balance of trade
• Foreign assets
• Balance of invisibles
• Special Drawing Rights
Select the correct answer using the code given below:
• 1 only b. 2 and 3 c. 1 and 3 d. 1, 2 and 4
Ans: (c)