Synopsis: India's Finance Minister, Nirmala Sitharaman, reaffirms the government's commitment to internationalising the rupee, aiming to simplify regulations and encourage foreign investments. However, bankers highlight significant challenges in competing with well-established global currencies like the dollar.
India's Finance Minister, Nirmala Sitharaman, has emphasized the government's intention to promote the rupee as an international currency.
In her budget speech, Sitharaman announced plans to simplify rules and regulations to encourage foreign direct investment (FDI) and overseas investment in India, aiming to enhance the rupee's use in international transactions.
The Reserve Bank of India (RBI) has been working on internationalising the rupee for years.
Their efforts include allowing persons resident outside India (PROIs) to open rupee accounts outside the country, facilitating bank lending to PROIs, and enabling FDI and FPI investments through special non-resident rupee and vostro accounts.
In May 2023, the RBI's annual report highlighted these initiatives, aiming to make the rupee a more prominent player in the global financial system.
However, Sitharaman and the RBI face significant hurdles in achieving this goal.
"Making the rupee an international currency is easier said than done," say bankers.
Global currencies like the dollar are highly liquid, and countries like the US control a vast amount of global trade.
Ashhish Vaidya, managing director at DBS Bank India, explains, "These currencies are fully convertible, and transferring large sums of money is far easier and quicker compared to countries like India. The rupee is not fully convertible on the capital account. Additionally, while India's trade is growing, it is still not among the largest in the world. To make the rupee an international currency, significant changes in the financial infrastructure and capital account will be necessary over time."
The RBI has introduced measures to support this transition, including regulations announced in July 2022 that allow for invoicing, payment, and settlement of exports and imports in rupees.
Exports and imports can now be denominated and invoiced in rupees, but banks still require prior approval from the RBI before enabling companies to use these facilities.
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