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Internationalising The Rupee UPSC NOTE


Steps taken

  • India has taken some steps to promote the internationalisation of the rupee, e.g., enable external commercial borrowings in rupees.

  • With a push to Indian banks to open Rupee Vostro accounts for banks from Russia, the UAE, Sri Lanka and Mauritius.

  • Measures to trade with 18 countries in rupees instituted.


  • Vostro account transaction have been limited, with India still buying oil from Russia in dollars.

  • Ongoing negotiations with Russia to settle trade in rupees have been slow-going.

  • Russia expected to have an annual rupee surplus of over $40 billion — reports indicate that Russian banks have been averse to the trade, given the risk of further currency depreciation.

  • Lack of awareness among traders about local currency facilities. 

  • In short, there is very little international demand to trade in the Indian rupee.

  • For a currency to be considered a reserve currency, the rupee needs to be fully convertible, readily usable, and available in sufficient quantities. 

  • India does not permit full capital account convertibility (i.e., allowing free movement of local financial investment assets into foreign assets and vice-versa).

  • Significant constraints on the exchange of its currency with others — driven by 

    • Past fears of capital flight (i.e., outflow of capital from India due to monetary policies/lack of growth) and exchange rate volatility, given significant current and capital account deficits.

Lessons from China

  • China’s example in internationalising the Renminbi has lessons. 

  • As an online article highlights, before 2004, the RMB could not be used outside China. 

  • By 2007, the “Dim Sum” bond and offshore RMBD bond market had been created, with financial institutions in Hong Kong allowed to issue dim sum bonds by 2009. 

  • Post 2008, China pursued a phased approach, enabling the use of the RMB for trade finance (i.e., financial instruments for facilitating international trade and commerce), investment and, over the long term, as a reserve currency.

  • First, it allowed the use of RMB outside China for current account transactions (e.g., commercial trade, interest payment, dividend payments) and for select investment transactions (e.g., foreign direct investment, outward direct investment). 

  • By 2009, China had signed currency swap agreements (i.e., an exchange of an equivalent amount of money, but in different currencies) with countries such as Brazil, the United Kingdom, Uzbekistan, and Thailand. 

  • Soon, it allowed central banks, offshore clearing banks and offshore participating banks to invest excess RMB in debt securities. 

  • The Shanghai Free Trade Zone was launched in September 2013, to allow free trading between non-resident onshore and offshore accounts.

  • Over time, the RMB was internationalised, with reserve currency status increasingly enabled (e.g., by Q2 2022, the RMB’s share of international reserves had reached ~2.88%), as the article highlights.

Way forward

  • Many reforms can be pursued to internationalise the rupee. 

  • It must be made more freely convertible, with a goal of full convertibility by 2060 – letting financial investments move freely between India and abroad. 

  • This would allow foreign investors to easily buy and sell the rupee, enhancing its liquidity and making it more attractive. 

  • Additionally, the RBI should pursue a deeper and more liquid rupee bond market.

  • Enabling foreign investors and Indian trade partners to have more investment options in rupees, enabling its international use. 

  • Indian exporters and importers should be encouraged to invoice their transactions in rupee — optimising the trade settlement formalities for rupee import/export transactions would go a long way. 

  • Additional currency swap agreements (as with Sri Lanka) would further allow India to settle trade and investment transactions in rupees, without resorting to a reserve currency such as the dollar.

  • Additionally, tax incentives to foreign businesses to utilise the rupee in operations in India would also help. 

  • The RBI and the Ministry of Finance must ensure currency management stability (consistent and predictable issuance/retrieval of notes and coins) and improve the exchange rate regime. 

  • More demonetisation (or devaluation) will impact confidence. 

  • A start could be made to push for making the rupee an official currency in international organisations, thereby giving it a higher profile and acceptability. 

  • The Tarapore Committees’ (in 1997 and 2006) recommendations must be pursued including 

    • A push to reduce fiscal deficits lower than 3.5%.

    • A reduction in gross inflation rate to 3%-5%.

    • A reduction in gross banking non-performing assets to less than 5%.

  • The government’s road map for further internationalisation of the rupee will make it easier for Indian businesses to do business/invest abroad and enhance the rupee’s liquidity, while enhancing financial stability. 

  • It must also benefit Indian citizens, enterprises and the government’s ability to finance deficits. 

  • It is a delicate balance to trade off rupee convertibility for exchange rate stability. 

  • One hopes predictable currency management policies will be instituted.



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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Internationalising The Rupee UPSC NOTE
Internationalising The Rupee UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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