Internationalising the rupee without the ‘coin tossing’ – on internationalisation of the rupee | 7 July 2023 | UPSC Daily Editorial Analysis

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What's the article about?

  • It discusses the rupee's internationalisation: its history, current status, and future prospects.


  • GS3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment;
  • Essay;
  • Prelims


  • The Union government from the past few years took various initiatives to increase the global presence of the Indian rupee.
  • In this pursuit, the government recently announced a long-term road map for further internationalisation of the rupee.


History of rupee's internationalisation:

  • In the 1950s, the Indian rupee was legal tender for almost all transactions in the United Arab Emirates (UAE), Kuwait, Bahrain, Oman and Qatar.
  • In 1959, to mitigate challenges associated with gold smuggling, the Reserve Bank of India (Amendment) Act was brought in, enabling the creation of the “Gulf Rupee”, with notes issued by the central bank for circulation only in the West Asian region.
  • Holders of the Indian currency were given six weeks to exchange their Indian currency, with the transition happening smoothly.
  • However, by 1966, India devalued its currency, eventually causing some West Asian countries to replace the Gulf rupee with their own currencies.
  • Flagging confidence in the Indian rupee’s stability combined with an oil-revenue linked boom, slowly led to the introduction of sovereign currencies in the region.

Current status:

  • At present, India’s share of global goods trade is approx. 2, the share of the daily average share for the rupee in the global foreign exchange market hovers around approx. 1.6%.

Why is India's rupee (INR) not an international currency yet?

  • Low confidence:
    • Repeated actions of demonetisation (2002, 2016, etc) lowered the confidence in the INR especially in our neighbours Bhutan and Nepal.
  • Rupee is not fully convertible:
    • 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), with 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.
  • India’s Trade Deficit with Major Trade Partners:
    • India has a trade deficit with its major trading partners including China, UAE, Saudi and Russia.

Steps taken by government so far:

  • enable external commercial borrowings in rupees
  • 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

Lessons from China: China successfully internalised its Renminbi. Following steps were taken by China:

  • 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. 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.


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

Way Forward:

  • 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.

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