Can the Indian rupee take centre stage in the global currency race?

Siddharth Roy

(siddharth01.roy@gmail.com)

The economies around the world are running towards becoming the next superpower. But what makes a superpower? Is it the strong military might of a nation, political stability, powerful demographics, or high cultural attractiveness? Today’s superpowers are the ones with a strong economy and a globally dominant currency. The best example of this fact is the United States of America. America’s global hegemony is based on the supremacy of the dollar in the international market. For the last 80 years, the dollar has been the world’s premier reserve currency, dominating the global currency market. But can the Indian rupee challenge the might of the American dollar? This might become true in the near future due to some concrete steps taken by our Indian government.

Recently, many nations around the globe have shown keen interest in settling their international trade in Indian rupees. The RBI has taken measures to open rupee vostro accounts in around 18 countries, including Russia, Sri Lanka, Myanmar, and Germany. After the economic bloodbath of the Silicon Valley bank and the Signature bank in the United States of America, the global trading nations are pushing forward the agenda of de-dollarization, which opens the door for the Indian rupee to rise up the pedestal of global currencies. American investor Jim Rogers is of the view that the monetary policy and sanctions are doing more damage to American interests than to those of the sanctioned countries. The dollar, which held 71% of reserves in the Global Central Bank, has now come down to around 59%. By the 2020 fourth quarter, the share of dollars in the global forex reserves was at a 25-year low. The reason was the rise of the euro and renminbi. According to a report by Goldman Sachs, the US dollar’s condition is becoming similar to that of the 20th-century UK pound. Right from 2014, when the US imposed economic sanctions on Russia, the world started exploring alternatives to the US dollar to find a solution if ever any nation came under US sanctions. Post this event, China, Russia, and Russia-India started working on payment gateways without the involvement of dollars, which decreased their circulation in the global market. Some estimates predict that the use of dollars might get reduced by around 40–50% in the next 5–6 years. The Euro is playing an upper hand in the global trading market, and Russia is promoting its rouble by supplying cheap Russian oil. The weaponization of the dollar by the US through sanctions is taking a great toll on the currency’s reputation worldwide. This can be seen in a recently held conference between Iran and West Africa. Iran followed India’s path and signed deals with West African countries, ditching the US dollar. So, is it possible for the Indian rupee to become the next US dollar? With the internationalisation of the Indian rupee, this distant dream can become a reality soon.

In July 2022, the RBI set up an international settlement of trade in Indian rupees mechanism. With the help of this mechanism, in December 2022, India completed its first foreign trade with Russia in Indian rupees. RBI had released a report a year ago on currency and finance saying that in today’s era, the ‘internationalisation’ of the Indian rupee is unavoidable. That means the rupee can be freely used by both Indian residents and non-residents in the international market and can also be used as a global reserve currency worldwide. On July 11, 2022, the RBI allowed settlement of trade in rupees for import and export of goods and services. Initially, it was done to protect its bilateral trade with Russia bypassing US sanctions, but soon enough various other countries started showing interest in this mechanism. A total of 35 countries in Asia, Africa, and Scandinavia have shown their interest in the Indian rupee by replacing the dollar with the rupee for trade settlements. For those countries that have dollar deficiency in their currency reserves and also for those that are facing sanctions from the US, a rapid move towards this rupee trade settlement mechanism is necessary. This is a much-needed step for the Indian economy due to rising pressure on the forex reserves. India is a net importer, and so the value of the Indian rupee is depreciating. It’s shocking to know that the Indian rupee was Asia’s worst-performing currency in 2022. With the internationalisation of the Indian rupee, the outflow of dollars will decrease and the rupee outflow will increase, giving a push towards rupee appreciation. If the Indian rupee’s demand rises in the international market, it will have a positive impact on the trade deficit, pulling its numbers down, and it will also increase the rupee’s global acceptance. The creation of Vostro accounts by Indian banks in foreign nations is a welcome step by the RBI, giving them the impetus to settle the trade in Indian rupees.

This rupee trade settlement mechanism seems to be a very exciting and revolutionary step, but it is filled with a lot of challenges and complications as well. Trade between two countries depends on various factors like political and economic relations, availability of goods, quality, competitive pricing, and exchange rates. India still imports fossil fuels, edible oil, gold, and silver in large numbers, impacting the value of the Indian rupee. Experts also believe that foreign exporters need incentives to adopt the Indian rupee as the settlement currency. If the Indian government wants to make the Indian rupee a highly tradable currency in the international market, then imports and exports need to be intensified along with some critical reforms like strengthening the Indian financial market. When all of these happen in sync then only India will be able to tap 100% of its potential revolutionary measures. The RBI’s allowing of the opening of Vostro accounts and the usage of rupee-denominated masala bonds in the global debt market, along with the government of India’s policy push towards internationalisation of the Indian rupee, are welcome steps in making the rupee a strong global trading currency in this multipolar world.