Rupee’s Globalization Challenges

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Today’s Publisher’s Parmesan talks about India's ongoing campaign to enhance the global prominence of the rupee in cross-border payments highlighting the challenges being faced to reduce the reliance on the US dollar.

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Rupee’s Globalization Challenges

Rupee struggles to make inroads in global FX transactions 🌍💱

India's ongoing campaign to enhance the global prominence of the rupee in cross-border payments has faced obstacles, highlighting the challenges faced by countries seeking to reduce their reliance on the US dollar.

The Reserve Bank of India (RBI) has granted over a dozen banks the authority to settle trades in rupees with 18 countries, while actively encouraging major oil exporters like the UAE and Saudi Arabia to accept the Indian currency for trade settlements.

However, the success of these initiatives has been limited thus far, with negligible total local currency trade volumes amounting to approximately 10 billion rupees ($120 million) since the project's inception. This figure pales in comparison to India's total goods trade of $1.2 trillion in the previous fiscal year. These statistics, shared by anonymous sources, highlight the need for further efforts to bolster the rupee's global standing.

India's pursuit of internationalizing the rupee is closely intertwined with Prime Minister Narendra Modi's vision of elevating India's global influence. As one of the world's fastest-growing economies, India aims to position itself as a viable alternative to China in manufacturing during the post-Covid era. While India seeks to decrease its reliance on the US dollar, some of its policies contradict this objective. The country still maintains capital controls, exercises strict control over the currency, and faces challenges such as a persistent current account deficit and a modest share of global exports, approximately 2%.

According to Eswar Prasad, a professor at Cornell University and author of The Dollar Trap, the prospects of the rupee becoming a significant international currency depend on India's economic and geopolitical strength, as well as the openness of its capital account and the quality of its financial markets.

Recent events have shed light on the challenges India faces.

During a surge in cheap Russian oil imports, India struggled to pay in rupees, as Moscow preferred the yuan or the United Arab Emirates dirham due to exchange-rate volatility. As a result, India is now burdened with accumulating up to $1 billion in stranded rupee assets each month.

To address the surplus of rupees, India has proposed that foreign countries invest in its government bonds and bills. However, India remains cautious about opening up its markets. For instance, it recently refused to provide tax exemptions for trading on international bond platforms, a move that would have facilitated India's inclusion in global debt indexes. Additionally, India withdrew a plan to issue sovereign bonds in overseas markets.

Governor Shaktikanta Das of the RBI emphasized that internationalization is a gradual process rather than an immediate target during an interview with Central Banking magazine. India's efforts to promote rupee payments for trade have drawn comparisons to China's attempts to internationalize the yuan. As the United States seeks to counterbalance China's growing influence in the Indo-Pacific, India's initiatives reflect the broader movement challenging the hegemony of the US dollar. Notably, Brazil and China recently struck a deal to settle trade in their local currencies, while even France has begun conducting transactions in yuan.

China Comparison

It is important to acknowledge the differences between India and China, particularly China's significantly greater influence in global finance.

In May, the Chinese yuan held the fifth-largest share as a global payments currency, accounting for 2.5%, whereas the rupee did not rank among the top twenty, according to the latest Swift data. Regarding global forex turnover, the yuan boasts a 7% share compared to the rupee's 1.6%, as reported by the Bank for International Settlements.

Nonetheless, the benefits for India are evident. Encouraging rupee transactions mitigates currency risks for Indian businesses, reduces the need for maintaining large forex reserves, and enhances resilience against external shocks.

Usha Thorat, former deputy governor at the RBI, clarified that India's goal is not to make the rupee a reserve currency but instead to facilitate its use as a medium of transaction and payment.

While it may be premature to dismiss India's endeavours to establish a larger role for its currency, the country's projected status as the second-largest contributor to global growth through 2028, according to the International Monetary Fund, bodes well for future prospects.

Additionally, a recent RBI report, containing recommendations for the country's leaders, advocates for measures to promote the international use of the rupee further. With the rupee performing well among Asian currencies, gaining 0.1% this year, there is optimism for India's pursuit of a more influential global presence.

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