Internationalisation of Indian rupees is possible despite challenges

Recently India has made its first-ever payment in rupees to the United Arab Emirates (UAE) for crude oil acquisition. This measure is being hailed as a significant effort to encourage the use of the Indian currency, the rupee, in bilateral trade.

This will hasten the process of the rupee becoming an internationally recognised currency while also contributing to a decrease in demand for the dollar. Additionally, it will protect the Indian economy from global monetary disturbances. Also, this process of internationalising the rupee reduces the need for foreign exchange reserves.

According to media reports, public sector oil company Indian Oil Corporation (IOC), has made payment in Indian rupees for the acquisition of 1 million barrels of crude oil from Abu Dhabi National Oil Company (ADNOC). In December 2022, a portion of the imported crude oil from Russia was also paid for in rupees. Credit must be attributed to the government and RBI for their efforts in globalising the rupee and encouraging the use of rupees for international transactions.

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Dollar as king

Currently, India relies on imports to fulfill over 80 per cent of its oil requirements. To accomplish this, India must make a substantial payment in US dollars. In the context of globalisation, the exchange rate of a country’s currency against the US dollar has a significant impact on both the country’s economy and the prices of various goods in the market. As per the International Standard Organization list, there are a total of 180 currencies worldwide, with the ‘US Dollar’ being the most dominant among them. The US dollar assumed the role of the primary currency for international transactions during the Bretton Woods Conference of 1944.

Requirement of dollar

During the fiscal year 2022–2023, which covers the period from April 2022 to March 2023, India acquired a total of 232.7 million tonnes of crude oil, resulting in a total expenditure of $157.5 billion. West Asia comprised 58 per cent of the overall supply, with Iraq, Saudi Arabia, Russia, and the United Arab Emirates making substantial contributions. The domestic supply is inadequate to satisfy the demand, resulting in a deficit exceeding 15 per cent. Furthermore, the nation’s need for dollars has escalated as a result of the ongoing surge in imports of coal, fertilisers, vegetable oils, pharmaceutical raw materials, chemicals, and other commodities. As a result, the trade deficit is increasing while the amount of foreign exchange reserves is decreasing.

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Diminishing role of dollar

The topic of reducing reliance on the US dollar, also known as de-dollarisation, has been increasingly prominent in recent times. The proportion of the US dollar in global currency reserves declined from over 70 per cent in 1999 to 59 per cent in 2022. Still, the US dollar is the most widely traded currency, representing 45 per cent of total global transactions. It is followed by the Euro at 16 per cent, the Yen at 8 per cent, the pound sterling at 6 per cent, and the remaining percentage is accounted for by other currencies.

In fact, we have to work even more at the grassroots level to make the rupee a global currency. According to the latest survey by the Bank for International Settlements, India’s share in major exporters is a paltry 1.8 per cent and in imports is 2.8 per cent and the average daily share of the rupee in foreign exchange market turnover is only 1.6 per cent. Oil exporters have generally been reluctant to accept the rupee currency, despite a few successful settlements involving non-oil trade. This is mostly because of worries about the high costs of transactions and money repatriation. The oil ministry noted that payments for crude oil can be made in Indian rupees as long as suppliers fulfill the necessary legal requirements during testimony before a parliamentary standing committee.

Better future for rupee

Yet today, India is the world’s fastest growing one of the major economies. It is the fifth largest global economy with a GDP of US$3.75 trillion in 2023. Given the strong economic recovery after the COVID-19 pandemic, the rupee has the potential to become an international currency. China has made great efforts for many years to make the yuan a global currency and during the year 2022, more than 7 per cent of global transactions were done through the yuan, and it became the fifth most traded currency.

Similarly, the RBI has taken a significant step to promote the use of the rupee abroad in the last three years by allowing 20 banks operating in India to open 92 Special Rupee Vostro Accounts (SRVA) with partner banks in 22 countries. It allows exporters and importers from these countries to conduct trade transactions in domestic currencies, facilitating an easier and more efficient trading system.

With this, importers importing goods or services will be able to pay the price of their goods to the foreign seller in rupees, that is, the importer’s bank will be able to deposit the price of the goods in rupees directly in the Vostro account of the exporter’s bank. As the global usage of rupee increases, it will improve the bargaining power of Indian businesses which will not only add weight to the Indian economy but will also enhance India’s global stature and respect. Apart from this, 64 countries have expressed interest in doing business in Indian rupee.

Way forward

Internationalisation for the Indian rupee is still a long way off, but rupee deals with Singapore and the UAE and Special Rupee Vostro Accounts are steps in the right direction. In order to meet global demands, it is imperative to enhance domestic production and simultaneously boost exports of both goods and services to the identified countries. Amid the Covid-19 pandemic, the country has successfully exported medications for the coronavirus to over 200 countries.

Under such circumstances, numerous nations have a strong emotional affinity towards India, which can enhance the potential for new export opportunities. Furthermore, India, as the chair of the G20 summit, has not only effectively facilitated a fruitful summit, but has also provided a new direction to global economic interactions. The G20 has significant influence in the global market, as its member countries collectively account for 85 per cent of the global Gross Domestic Product (GDP), 75 per cent of global trade, and include approximately two-thirds of the world’s population. India should promptly establish Free Trade Agreements (FTAs).

The government should grant specific tax exemptions to exporters who repatriate their export earnings in Indian rupee. The current imperative is to develop a scheme that facilitates an increase in global trade conducted in rupees, thereby reducing the trade deficit. In order for a country’s currency to achieve global recognition, it is imperative that the country demonstrates advancements in its democratic system and economic policies. Coincidentally, both of these elements exist in India. Undoubtedly, we still have a considerable distance to cover, but it is within the realm of possibility.

The author is Associate Professor, Atal Bihari Vajpayee School of Management and Entrepreneurship (ABVSME), Jawaharlal Nehru University (JNU), New Delhi. Views expressed in the above piece are personal and solely that of the author. They do not necessarily reflect Firstpost_’s views._

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