Can the Indian rupee replace the dollar as an international currency?

The US dollar, Euro, Japanese Yen, British Pound, and to a lesser extent the Chinese Yuan currently hold the distinction of being an international currency.

India has taken a significant step toward achieving this status for the rupee.

But what does it mean for a currency to be international and why is India making this move? What are the risks involved?

What did people do before money existed?

Before currency existed, civilizations operated with a barter system.

Without the use of money as a ‘middleman,’ products or services are exchanged for one another in a barter system.

But the barter system had several drawbacks, including the inability to make postponed payments, the lack of a standard unit of measurement for everyone, and the difficulty of storing things.

Enter International currency

The creation of money resolved these issues.

A sheet of paper was suddenly valuable. Additionally, confidence was exchanged in addition to the paper currency.

Without faith, a currency has no worth. And a currency has more value the more merchants trust it.

A currency that is widely accepted as a means of payment across numerous nations is known as an international currency.

The British pound rose to prominence as a world currency during colonisation.

Following the 1944 Bretton Woods Accord, the US dollar supplanted the previous gold standard as the world's reserve currency. Additionally, in 1973, the US mandated that OPEC (Organization of the Petroleum Exporting Countries) members limit their oil sales to US currency in return for their political and military support.

Rupee goes global

India has been working towards the internationalization of the rupee for years.

In 2013, the Reserve Bank of India allowed foreign investors to hold ‘masala bonds.’ These were rupee-denominated bonds, making it easier for foreign investors to buy and sell such assets.

In 2015, the RBI allowed foreign investors to trade in rupee-denominated derivatives.

In 2019, the Indian government began a process of liberalizing the exchange rate, making the rupee more attractive as a reserve currency.

Now is an opportune time for rupee internationalization

The demand for the rupee is rising as a result of the booming commerce and investment in India's economy.

With global corporations opening up facilities in India to tap into the nation's sizable and expanding market, the nation is evolving into a more alluring location for foreign investment.

Data from the RBI shows that from $12 billion in 2008 to $80 billion in 2020, foreign portfolio investments in India have increased.

Increased trade and investment opportunities will result from the rupee's internationalisation as India's economy becomes more integrated with the world economy.

Additionally, it would increase the rupee's predictability and stability, which makes it a more appealing choice for international investors and central banks seeking to diversify their holdings.

What are the risks?
The economy and political stability of India are linked to the value of the rupee, and both factors are susceptible to changes brought on by things like elections, economic slowdowns, and geopolitical tensions.

If there is an abrupt surge in demand, the rupee may become more volatile. The rupee's value would vary more, which would make it exceedingly difficult for enterprises and investors to plan for future trade and business operations in India.

The possibility that the dollar and pound might compete with the rupee as it becomes more active globally is another. This might result in the rupee's depreciation, which would raise the cost of products and services from India on global markets.

Additionally, if the rupee gains too much traction as a reserve currency, it could result in significant capital inflows and currency appreciation, which would lower exports' competitiveness.

Should the rupee go international, despite risks?
In the long run, the advantages of the rupee going worldwide might outweigh the disadvantages.

According to the Finance Minister Nirmala Sitharaman in 2022, India received 65% more FDI during the Modi administration than it did during the previous 10 years of governance.

In fact, the rupee is already well on it’s way to becoming an international currency. In December 2022, India and Russia completed their first trade settlement in rupees, as part of the International Settlement of Trade. Sri Lanka, Bangladesh, Mauritius and some other countries are already considering the settlement of bilateral trade in Indian rupees.

Saudi Arabia and UAE may also soon start payment mechanisms in rupee.

If done strategically, the rupee going global will be beneficial to India as it would further integrate our economy with the global economy, creating more opportunities for trade and investment and make the rupee more stable predictable and in demand across the planet.

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