Indian rupee has potential to be global currency

Moves are already underway to introduce the Indian rupee (INR) as an international currency accepted by its trading partners worldwide. Since India’s economy is growing, there are greater opportunities to make it a global currency.

Main stakeholder institutions, including the Reserve Bank of India and the Ministries of External Affairs and Commerce have already discussed ways and means to promote international trade using Indian rupees instead of the US dollar.

Banks have been told to ask exporters to negotiate on rupee trade, which is a drastic step forward in making the INR a global currency.

Several Sri Lankan companies including Mahindra Motors and the Tourism sector too has requested the INR to be recognized in Sri Lanka.

Chief Economist at Bank of Baroda,   Madan Sabnavis

In another move, India has allowed Sri Lankan citizens to hold up to $10,000 (8.14 lakh Indian rupees) in Indian rupees in physical form. They will also be able to convert the neighbor’s currency into those of other nations, thus enabling trade.

India has also made it possible for Sri Lankan nationals to physically possess up to $10,000 (8.14 lakh Indian rupees) in Indian rupees. Additionally, they will be able to exchange the neighbor’s currency for that of other countries, facilitating trade.

In light of the fact that India, the fifth-largest economy in the world, is also one of Sri Lanka’s main trading partners, this could help the country throughout its unparalleled economic crisis.

The trade between the two countries was $6.81 billion in 2021–2022; more goods were exported from India than were imported. However, as a consequence of the financial crisis, exports this year were almost cut in half.

India’s action to benefit SL

While the Indian rupee cannot be used as legal tender by Sri Lankans under this move, it will give the island nation, facing an acute dollar shortage, some liquidity support for imports.

With 22 million people, it has struggled to supply its citizens with food, medicine, fuel, and other essentials for many months.

On the other hand, India’s decision also coincides with its efforts to popularize its currency among Asian nations and to reduce its reliance on the US dollar.

It introduced the rupee trade mechanism in July, some months after western countries blocked Russian banks from the SWIFT financial messaging system, which facilitates cross-border payments. This new mechanism allowed for the settlement of global trade in Indian rupees.

How will the arrangement with Sri Lanka be facilitated?

To enable Sri Lankans to hold Indian rupees, that nation’s banks must first have nostro accounts with Indian lenders, the Business Standard reported. Nostro accounts are those opened by a bank with a foreign bank and in that foreign country’s currency to facilitate bilateral trade and other financial transactions. Besides, offshore units of Sri Lankan banks will be set up in India to accept deposits from its citizens living there.

India has also eased regulations to help Sri Lankan students and tourists. They can now withdraw in cash up to $5,000 in Indian rupees as foreign travel allowance.

The rupee, India’s currency, can be converted into an international currency in two ways:by making the rupee a stable currency to enable international trade or to keep it as an asset.

By exporting more, other countries can use these two modes of internationalization, which are not mutually exclusive. In a one-liner statement, for a currency of trade, it needs to be a currency in which assets are held and vice versa.

In the short run, internationalisation as a trade currency is a difficult task. The Chinese Yuan is notably becoming a currency of trade because China manufactures and exports almost everything. This might only change if India powers up as a manufacturer like China.

The possible ways to make INR a currency for international trade are:

To internationalise the rupee as a safe asset, its economic size matters a lot. India meets this criterion with its huge economic size. Even this has its limitations, as India imports more than it exports. The trade deficit created takes away the advantage provided by the growth rate.

The Reserve Bank of India controls India’s capital account with an iron fist.

To internationalize the rupee, the capital-free flow has to be allowed. Even though the value of the rupee is determined in the open market, the RBI’s open market operations help maintain its stability.

The Indian rupee is accepted informally in neighbouring countries like Nepal, Bangladesh, Bhutan, and parts of the Maldives. It is even accepted as legal tender in Zimbabwe.

It was possible because India exports a lot to these countries. Exports are the deciding factor in a currency becoming a currency of international trade, not imports, and the rupee’s acceptability increased automatically in these countries.

With G20 Presidency Indian economy poised to grow

With India taking over the G20 presidency from December 1 its economy is poised to grow further stabilizing its currency.

On July 11 of this year, the Reserve Bank of India (RBI) issued a circular saying it had decided “to put in place an additional arrangement for invoicing, payment, and settlement of exports and imports in INR.” The idea, the RBI said, was to “promote the growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in the INR.”

While it was anticipated that business with Russia would benefit the most from the decision to allow trade settlements between India and other nations to be made in rupees, it was also anticipated that the measure would reduce the depreciation of the rupee.

Opening Vostro accounts

Indian financial institutions can open Vostro accounts with financial institutions of the partner countries for trading in order to settle commercial transactions with almost any country. Indian importers can transfer INR into these accounts to pay for their imports. Then, Indian exporters can be paid in INR using these import revenues.

A Vostro account is an account a correspondent bank holds on behalf of another bank. These accounts are an essential aspect of correspondent banking, in which the bank holding the funds acts as a custodian for or manages the account of a foreign counterpart. For example, if a Spanish life insurance company approaches a U.S. bank to manage funds on the Spanish life insurer’s behalf, the account is deemed by the holding bank as a Vostro account of the insurance company.

Currently, exports or imports by a company are always in a foreign currency, with exceptions such as Nepal and Bhutan. So, in the case of imports, the Indian company has to pay in a foreign currency, which is mainly dollars but could also be pounds, euros, yen, etc.

The Indian company gets paid in foreign currency in cases of exports, and the company converts that foreign currency to rupees since it needs rupees for its requirements in most cases.

Although it was not specifically mentioned, the arrangement was expected to be used primarily in Russia. “Sanctions have been imposed on Russia following the Ukraine war, and the country has been removed from the SWIFT system (a system used by banks to make foreign currency payments).”

“This means that payments do not have to be made in foreign currency, which benefits both Russia and India,” Madan Sabnavis, chief economist at Bank of Baroda, told The Indian Express at the time.

Sabnavis said it was not likely that the arrangement would be extended to other countries. “We may want to, but others may not accept it as they may need foreign currency to pay for their own imports,” he said, adding that Sri Lanka may also want us to pay in dollars or any other foreign currency.

The arrangement was not expected to help arrest the fall of the rupee to any significant extent.

The rupee, like all global currencies, has been depreciating against the dollar, and the general trend has been towards a steady weakening for several months now. (www.indiannews.com)