RBI Expands Rupee Trade Mechanism to Boost Internationalization

Picture Credit: Business Standard

The Reserve Bank of India (RBI) has taken a major step toward the internationalization of the rupee by establishing a trade settlement mechanism with 18 countries. This move aims to promote the use of the Indian currency in global trade and reduce dependence on the US dollar for cross-border transactions.

The internationalization of the rupee refers to its increased use in cross-border trade and investment, allowing payments for imports and exports to be made directly in rupees. This shift would enable the international settlement of trade in Indian currency, making it a more widely accepted medium of exchange in international markets.

The benefits of this process are significant. It can lower transaction costs and mitigate exchange rate risks, providing Indian businesses greater stability when dealing with foreign partners. By eliminating exposure to currency volatility, exporters could become more competitive in the global market. Additionally, increased use of the rupee in trade could help India integrate more deeply with the global financial system and reduce the need to hold large foreign exchange reserves, freeing up resources for other economic priorities.

However, the path toward a fully internationalized rupee is not without challenges. Implementing rupee-based trade arrangements has proven complex, with some delays and operational hurdles. Trade imbalances could also leave partner countries holding excess rupee reserves, which they may struggle to use effectively. Moreover, the rupee market remains relatively small and tightly regulated, limiting its liquidity and attractiveness compared to global currencies like the dollar or euro.

To advance the rupee’s global role, India can take inspiration from China’s experience with the internationalization of the Renminbi (Chinese Yuan) . Expanding currency swap agreements, creating offshore rupee markets, and issuing rupee-denominated bonds could all strengthen confidence in the currency. At the same time, careful planning will be necessary to ensure these steps do not destabilize India’s financial fundamentals.

The RBI’s move marks an important milestone in India’s journey toward making the rupee a globally accepted currency. While progress may be gradual, the foundation for a more internationally integrated Indian economy is clearly taking shape.