We look wistfully at currencies like dollar, yen, euro that are freely convertible and acceptable in all parts of the world. Will the Indian Rupee ever be widely accepted in other countries like these much sought after currencies?
Free convertibility requires that there be no restrictions on the buying and selling of the currency in the market. Historically, only relatively rich countries with large economies and trading strength have had the capability and external credibility to let there be no restrictions on capital movement across borders. India still has some way to go to reach that stage.
However, “going global” does not necessarily mean that the currency has to be a freely convertible currency. It is possible for a currency to be accepted in international markets, even without being fully convertible.
Very few would recall that this indeed was the case in the first two decades after Independence. The Indian rupee was legal tender in the former British Persian Gulf protectorates of the UAE, Kuwait, Bahrain, Oman and Qatar, and pegged to the British pound with a fixed exchange rate. There was also a Haj rupee that could freely be exchanged with the Saudi riyal. These arrangements ended when the rupee was devalued in 1966 and delinked from the pound.
At this stage of our economic development, is it worthwhile aiming to go global? It is. For example, if the rupee can be used for trade instead of the dollar or other currency, our exporters and importers won’t have to face the ever-present risk of losses due to ups and downs in the exchange value of the currency. For the RBI, to the extent that trade and financial transactions can be carried out in rupees, it reduces the need for holding foreign exchange reserves. For the domestic public and the diaspora, it reduces the cost of remittances and makes it much more convenient in spending money abroad.
Even if it is worthwhile, is it really possible? Today, as it happens, the emerging geopolitical forces are creating favourable conditions for the possible cross-border uses of the rupee. The Ukraine conflict and the Western economic sanctions on Russia have led to segmentation of the world economy. Unilateral seizure of Russia’s dollar held reserves have created jitters outside the Western world. Since most countries hold reserves in dollars, they are understandingly worried.
Accordingly, non-Western countries who have chosen to stay neutral in the conflict are looking for options to reduce their reliance on the dollar. This opens up areas for greater international use of other currencies, including the rupee. For example, reduction in scope of the hitherto worldwide SWIFT network for financial messaging provides an opportunity for countries like India with its robust digital payment and settlement systems to provide alternatives. The increasing oil imports from Russia that cannot be paid for in dollars create another need for alternative mechanisms for payment.
In the UPI, India has an advanced domestic digital payment system, superior to similar systems elsewhere in the world. The international potential of UPI is just beginning to be tapped. Recently, the finance minister announced agreements with the UAE and Singapore for enabling UPI payments. This means that an Indian tourist will be able to walk into a shop in these countries and pay through UPI. Indians abroad will be able to use UPI for remittances to their families.
There is news even for those fond of skirting the other extreme of legality. MetaMask, an international cryptocurrency wallet has decided to accept UPI payments, making crypto trading easier!
The possibilities for using rupees in foreign trade are expanding. RBI is encouraging overseas trade in rupees through the Special Rupee Vostro Account (SRVA). These SRVAs are accounts operated in rupees and can be used for settlement of payments for imports and exports, without involving the dollar or any other convertible currency. The minister of state for finance revealed in Parliament that 60 banks in eighteen countries have reportedly been authorized by RBI to open SRVAs. These countries are Russia, Sri Lanka, Mauritius, Malaysia, Singapore, Myanmar, Israel, Germany, United Kingdom, Botswana, Fiji, Guyana, Kenya, New Zealand, Oman, Seychelles, Tanzania, Uganda. With Bangladesh, with which there is a sizable trade relationship, a direct rupee-taka trade is being separately worked out.
Technological trends are also working in favour. In the backdrop of the threat of unregulated financial flows like crypto, the RBI has launched a trial of a Central Bank Digital Currency (CBDC) based on blockchain technology, also known as the e-rupee. An authorized e-rupee, if it gains acceptance, could simplify cross border rupee transfers.
According to the World Bank Brief on Migration and Development, remittances by non-resident Indians add up to about $ 100 billion annually, and the average cost of making such a transfer of funds is about 4%. As direct rupee payment mechanisms gain strength, there is potential for huge savings in the transaction cost of remittances and funds transfer, substantially benefiting those sending money as well as those receiving money in India.
Evidently, even without having reached the stage of full convertibility, the rupee is slowly gaining acceptability, especially in countries where there is a strong trade relationship or large remittances from expatriates. Government initiative in recognizing and harnessing the demand, and backing it up with supportive diplomacy, will help speed up the process.
Interestingly, noted economist Nouriel Roubini, also known as the “Dr Doom” of Wall Street for correctly predicting the 2008 global economic crisis, forecasts a period of de-dollarization ahead following the Ukraine crisis. In the ensuing churning in the world economy, he sees the possibility of the rupee eventually becoming one of the global reserve currencies, particularly for South-South trade.
So can the rupee go global? Yes, it can, and must. The conditions are ripe, and if the ongoing initiatives take off, the sky is the limit!