06

The Reserve Bank of India (RBI) has taken significant strides this year by announcing the internationalization of the Indian rupee (INR). Internationalization implies widespread acceptance of the INR globally as a medium of exchange, allowing India to use INR for imports. This move by the RBI enables settling payments for international trade in INR, invoicing, and payments, which is part of a gradual de-dollarization plan.

In 2022, India has already utilized a substantial sum of US$40 billion to stabilize the INR. Internationalization of the INR provides India with the advantage of safeguarding its foreign reserves in US Dollars, thereby enhancing forex stability. Additionally, in a volatile market, India’s imports will no longer solely depend on the US Dollar. Even if the US Dollar experiences sharp fluctuations, the import expenditure will remain more manageable. Rajkumar Ranjan Singh, Union Minister of State (External Affairs), officially stated that the government is actively engaging with the Indian trading community, including Small and Medium Enterprises (SMEs), to simplify administrative procedures and implement this mechanism effectively.

Recent Developments

This month, 22 countries, including Russia, Bangladesh, Belarus, Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, Maldives, Kazakhstan, and the United Kingdom, have established special INR vostro accounts in Indian banks for trading in the local currency. These vostro accounts will enable domestic banks to provide international banking services and facilitate transactions in INR. This move is expected to boost global trade and emphasize India’s exports.

In the wake of sanctions imposed on Russia after the Russia-Ukraine war, the Kremlin was restricted from using the US Dollar. Consequently, alongside trading in the Chinese Yuan, Russia has agreed to engage in trade using INR. Additionally, the recent India-UAE deal for bilateral trade in INR-Dirham instead of the US Dollar is a significant move, considering that India-UAE bilateral trade is growing at an annual rate of 20% and aiming to double non-oil trade to US$100 billion by 2023.

Furthermore, the internationalization of INR will encompass G-Secs (Indian government bonds) in global bond indices. The group has recommended a review of taxes on Masala bonds (INR-denominated bonds issued abroad by Indian entities) and the international use of Real Time Gross Settlement (RTGS). This strategy is part of the long-term plan by the central bank, which formed an Inter-Departmental Group (IDG) in December 2021 to examine and recommend issues related to the internationalization of INR. India’s Foreign Trade Policy also pledges support for the RBI mechanism.

Concerns

Despite the government’s efforts to promote the INR on the international stage, concerns remain about its widespread adoption. Aside from a few countries, there is limited demand for INR in the international trading scenario. The government consistently emphasizes that INR will become an international currency soon. However, some economists question whether INR will yield better returns for Indian exporters than the US Dollar in a volatile market. Currently, around two-thirds of US Dollars are held and used outside the USA. The widespread use of the Dollar, large investments, fast payment settlements, and low conversion costs contribute to its strength. Exporters are also apprehensive that this move may lead to receiving fewer US Dollars for the same amount of goods.

Improving Trade Deficit

To improve the trade deficit, India must increase its exports compared to its imports, as India still pays in US Dollars for importing goods. Focusing on the manufacturing sector and ensuring rapid GDP growth will play a crucial role in achieving this goal. Additionally, easing INR convertibility will make India more attractive to other countries for trade in INR. Former Finance and Economic Affairs Secretary, Subhash Chandra Garg, commented on the matter, urging India to prioritize building a strong economy before expending time and energy on this pursuit.

In conclusion, the internationalization of INR represents a significant step by the RBI to strengthen India’s domestic currency and enhance its export prospects. However, challenges and concerns remain, requiring careful consideration and strategic measures to achieve widespread global acceptance of the INR as an international currency.