Internationalisation of the Rupee
The recent initiatives to internationalize the Indian Rupee aim to broaden its use for invoicing and settlement in foreign trade, enhancing its accessibility and reducing reliance on hard currencies. These efforts align with the changing geopolitical environment where the use of local currencies for international commitments is increasing.
Current Trends and Measures
- International Finance Corporation (IFC)
- Committed over $30 billion in 67 local currencies through various products between 2015 and 2024.
- ADB's Projection
- Local currency loans are expected to reach 50% of its private sector lending in the coming years.
- RBI's New Policies
- Permitting banks to lend in Indian Rupees to non-residents for cross-border trade.
India-Russia Trade: A Case Study
India-Russia trade provides a policy lesson with trade increasing from $1.5 billion in 2003 to $72 billion in 2024. However, invoicing largely in USD and settlement in roubles remains prevalent, underscoring the need for increased intra-industry trade and complementarities.
Sectorial Trade Composition
- Primary sector: 80% of bilateral trade
- Semi-processed goods: 9.9%
- Parts and components: 0.8%
- Final goods: 4.5%
Efforts to Enhance Rupee Usage
Organizations like the Federation of Indian Export Organisations must engage with the RBI to promote awareness about trade settlement in Rupees. The RBI has also entered into Local Currency Settlement System (LCSS) arrangements with countries such as the UAE, Indonesia, Mauritius, and the Maldives to reduce hard currency dependence.
Technological Advancements
- Linking UPI with the UAE’s payment platform for enhanced cross-border transfers.
- Agreements with Singapore and extension of UPI's reach to Europe.
- Potential for linking India’s SFMS with UAE’s messaging system to bypass SWIFT.
Long-term Economic Goals
To achieve the vision of a Viksit Bharat, reduction of trade costs and barriers is crucial, with goals including a $30 trillion economy by 2047 and $1 trillion in merchandise exports by 2030. Local currency settlements in free trade agreements should be prioritized.
Future Directions
- Multilateralisation of local currency settlements during India's BRICS Presidency.
- Exploration of SWIFT alternatives like the Russian System for Transfer of Financial Messages.
- Global collaborations by NPCI to build real-time payment systems using the UPI framework.
For the Indian payments and settlements system to thrive, trade arrangements with countries must be expanded and diversified.