By Akshath Indusekhar

Abstract

This article seeks to deconstruct the growing narrative towards the internationalisation of the Indian Rupee as a global currency, situating it within the prevailing geopolitical climate, regulatory considerations, economic causes and impacts. This shall be unravelled with a specific focus on the legal and economic barriers to such implementation, the new Foreign Trade Policy 2023 and its regulatory implications and legal/policy changes in achieving the intended goal; all in ultimately answering the question- would it be prudent, amidst legal, political and economic barriers, to envision international adoption of the Indian Rupee and what does the new policy promise?

The dollar’s dominance has been to the dismay of several nations and its stronghold as the “world’s currency” has remained largely unchallenged. Despite emerging as one of the world’s fastest-growing economies and a destination for global investors, the Indian Rupee simply cannot compete with the status that the dollar holds in the global arena, and when geopolitical tensions involving the US and an over-dependence on the currency tangibly obstruct bilateral trade among nations, the desire to topple the status quo has only grown.

For several years following the liberalisation of the Indian Economy, the appropriation of the rupee as an international currency has remained but a distant dream in the quest for the transformation of India into a truly “global” world power. By no means has this quest been devoid of challenges, appearing an unrealistic endeavour amidst a limited share in global trade and the regulatory regime attempting to safeguard and restrain the flow of the currency, appearing to be a rather myopic approach amidst long-term international objectives. However, the desire had been rekindled over the latter half of 2022, amidst a push for greater international transactions involving the rupee, and appears to have finally materialised over the last few months, with 18 countries worldwide agreeing to trade in rupees, in a move touted to topple the stronghold of the dollar in international trade. In light of this, through the course of this piece, the political causes, the legal implementation mechanism, critiques/risks associated with the policy and the impact of the internationalisation of the Indian rupee, in lieu of its usage in international trade, will be explored.

Before delving into the complexities surrounding the internationalisation of the Indian rupee itself, the impact of relevant geopolitical tensions, including the Russia-Ukraine war, cannot be understated. In July 2022, a few months after Russia’s invasion of Ukraine, India put forth a proposal to enable the payment, invoicing and settlement of trade in Indian Rupees with various trade partners, to avail cheaper crude oil amidst Western trade sanctions placed on Moscow. The immediate benefits, especially owing to Russia’s position in the international community simply could not be overlooked for both the country itself and its trade partners, and India’s relationship meant that settlement in the Rupee would be a convenient measure at the time. However, there existed a palpably deeper, long-prevailing goal of the globalisation of the Rupee, to reduce dependence on the Dollar. Several nations embraced this proposal, to avail the possibility of cheaper Russian crude oil, which would otherwise be lost in trade using the “world’s” reserve currency, the Dollar.

By no means are the talks to internationalise the rupee a new conversation- in the 1960s, for instance, several nations including Kuwait, Bahrain, UAE and Qatar, called the Gulf rupee at the time; however, this too was slowly replaced by local currencies. The rationale, in the present day and age, can be attributed to the need for insulation of the rupee from global shocks and, more prominently, a reduction in the demand for dollars, especially in the wake of the shortage of the currency amidst the sharpest tightening of the foreign policy by the Federal Reserve in several decades. The resultant “disaster-proofing” of the economy, as stated by Commerce Secretary Sunil Barthwal during an announcement on India’s new Foreign Trade Policy, is one of the many benefits intended to emerge from the internationalisation of the rupee. The Economic Survey further stated that the usage of the domestic currency for international trade could lead to the protection of the rupee from volatility and improve the ease of business in the global market, by a reduction of costs associated with the same.

That being said, however, the true internationalisation of any currency involves a plethora of conditions, and apparent barriers to the adoption of a “global rupee”. For instance, the rupee is merely partially convertible, restricting its free flow across international borders and more prominently, unlike currencies such as the Renminbi, the Rupee is not a reserve currency. The macroeconomic policy dimensions involving the RBI could very well serve as a barrier too, as although the value of the Rupee is determined by the open market, the Open Market Operations help maintain its stability- thus, this restricts the free flow of the currency. Moreover, the global acceptance of the Rupee is but a far cry, with the rupee’s daily average share in the total foreign exchange market turnover amounting to just 1.6%, dwarfing the US Dollar’s 88% stronghold. The lack of full capital account convertibility is another barrier, with the RBI’s fear of mass capital exodus and exchange rate volatility preventing the free conversion of the Rupee, requiring prior permission from the RBI for conversion over $250,000. Thus, the groundwork appears to be inadequate, which begs the question, how does the RBI intend to proceed with the goal of internationalisation of the rupee?

The new Foreign Trade Policy (FTP) 2023 seeks to promote exports with the implementation of a mechanism for invoicing and settlement of transactions in Rupees on a bilateral basis. This brings us to the mechanism of the scheme itself. The measures are facilitated by the settlement/invoicing of exports and imports in Rupee, at market-determined exchange rates between the trading nations, with the use of Special Rupee Vostro Accounts (SVAs) for the settlement of such transactions. According to a notification by the Directorate General of Foreign Trade, imports carried out by domestic firms would involve settlement by a payment in rupees, credited to the SVA of the corresponding country, against the invoice for the supply of goods and services by the overseas firms. Similarly, in the case of exports of goods/services, the settlement would be in Rupees via the designated SVA of the correspondent bank of the trade partner. Additionally, the RBI has permitted the surplus balance of Rupees in the SVAs to be used for investments in projects and government securities. The FTP will also seek to automate some trade approvals and reduce the charges for small and medium-sized businesses to secure benefits from the government.

Perhaps the most immediate benefits of this novel mechanism are the lowering of transaction costs, ease of settlement, greater price transparency, reduced costs of holding foreign reserve by RBI and, in the larger picture, promotion of international trade and an overall internationalisation of the rupee. This effectively curbs exchange rate risks faced by entities engaging in international trade and further, helps reduce the trade deficit. The trade deficit i.e. net exports minus imports, for instance, for merchandise, lay at USD 266.78 Billion for FY 2022-23, an aspect of great promise, and the willingness of more countries trading in the Rupee would allow for greater export, thereby reducing this deficit.

The policy has gained tremendous momentum, with eighteen countries, including Russia, Mauritius and Sri Lanka opening 60 Special Rupee Vostro Accounts in total to facilitate international trade in Rupees. The potential for trade settlement in the rupee, according to analysis by the International Trade Centre (ITC), would be more favourable with trade partners, such as Russia, UAE, Saudi Arabia and Iraq, where India is not only a large importer, but Indian exports are a possibility too. For instance, in the Sri Lankan context, according to several experts, the trade in Rupees would help save 50% in transaction costs, instead of routing payments in Dollars through a US-based clearing bank. This is distinctly relevant considering the fact that the massive dollar shortage was both a cause and effect of the prevailing Sri Lankan economic crisis, and the willingness of the nation to consider rupee debt for restructuring is a testament to the fact. The settlement in rupees provides Sri Lanka with much-needed liquidity to tide over its precarious economic predicament. Additionally, regarding the recent initiation of bilateral trade in rupees between India and Bangladesh, another tangible implementation of the intent to internationalise the rupee, the agreement allows for direct settlement in rupees, thereby slashing intermediary transaction costs in dollar conversion between the nations. The disruption of the inertia or status quo in dollar dealings may appear to still remain a far cry, but policy implementation such as above are promising measures.

While the promise of internationalisation of the rupee as a breakaway from dollar hegemony is indeed a fascinating prospect, growing concerns over the last few months have highlighted the challenges accompanying the same. An Inter-Departmental Group (IDG) of the RBI, in its report in July 2023, has flagged the risk of increased volatility of the exchange rate of the rupee in the initial stages. The Triffin Dilemma, identified in the 1960s, has been identified as a potential issue in the present case, implying the conflict of currency supply obligations to meet international requirements with domestic monetary policies; in simpler terms, a dilemma between short-term domestic and long-term international objectives. The initial costs emanating from additional currency requirements could increase volatility in demand, and while modern advancements in statistical reporting allow for the separation of foreign demand for money by most central banks, components such as cash still remain uncertain.

That being said, however, the ultimate conclusion of the report of the group was that the benefits of internationalisation in limited exchange rate risk, greater access to financial markets, and reduced foreign exchange requirements, among others, immensely outweigh the short-term concerns mentioned above, further indicating a detailed long-term roadmap to achieve international rupee settlement. This roadmap involves a staggered, granular approach to internationalisation of the rupee, suggesting a standardised approach in bilateral and multilateral trade in Rupees; it further suggests a push for inclusion of the rupee as an additional settlement currency in multilateral mechanisms such as the Asian Clearing Union for widespread adoption.

Thus, the question of the usage of the Rupee for international trade has been a subject of ground-breaking developments every week, especially amidst the geopolitical foreground. While India has been utilising its role in the international community to lobby for the international appropriation of the Rupee, the settlement mechanism envisioned above acquires special significance in the backdrop of aggressive policy hikes and the increasingly hawkish stand of the Federal Reserve. Ultimately, while critics may still argue that the internationalisation of the rupee is a far-fetched ideal, by no means a simple task, with several challenges highlighted above, the RBI’s new mechanism presents a great deal of promise and the trade benefits both in India and overseas simply cannot be overlooked. Coupled with the political and economic will of nations to topple the dollar’s stronghold, there certainly exists an exciting possibility for India to redefine its position in the realm of international trade.

Author’s Bio

Akshath Indusekhar is currently pursuing his third-year, B.A. LLB at the Jindal Global Law School. His areas of interest include public international law, corporate/commercial law, international trade law and investor-state arbitration, with international moot court experience and research experience to that effect. 

Image Source: https://www.financialexpress.com/wp-content/uploads/2022/08/VBK-RUPEE-DOLLAR-PTI.jpg