In cross-border payments, India’s year-old campaign to boost the role of rupee has made little progress, citing people privy to the development news agency Bloomberg reported on Friday. The Reserve Bank of India (RBI) has allowed more than a dozen banks to settle trades in rupees with 18 countries since last year and is encouraging big oil exporters such as the UAE and Saudi Arabia to South Asian countries to accept the local currency for trade settlements, as per Bloomberg report.
However, success has been elusive so far with total rupee trade volumes negligible at around Rs 10 billion ($120 million) since the project started, sources familiar with the matter told the news agency. That compares with India’s total goods trade of $1.2 trillion in the last fiscal year.
A Finance Ministry spokesperson didn’t respond to Bloomberg’s request seeking comment.
The moves to take the rupee global are closely entwined with Prime Minister Narendra Modi’s aspirations for a bigger global heft for India as it posts one of the world’s fastest rates of economic growth and positions itself as an alternative to China in manufacturing in the post-Covid era.
While India is betting on the globalisation of the rupee to reduce dollar demand and make its economy less vulnerable to global currency shocks, some of its policies run counter to those goals. Asia’s third-biggest economy still has capital controls and maintains a tight grip on the currency, while a chronic current account deficit and a smaller share of global exports, around 2 per cent, are other impediments.
“The rupee’s prospects of becoming a significant international currency are connected to India’s economic and geopolitical strength but also the openness of its capital account and the quality of its financial markets,” said Eswar Prasad, professor at Cornell University and author of The Dollar Trap.
The challenges became more apparent recently as India struggled to pay for a surge in cheap Russian oil imports in rupees. Moscow accounted for almost half of India’s oil imports in May, from less than 2 per cent before the invasion of Ukraine, according to data from analytics firm Kpler.
Russia was unwilling to accept rupees due to exchange-rate volatility, preferring the yuan or United Arab Emirates dirham. But a lopsided trade relationship between the two countries has forced it to accumulate up to $1 billion each month in rupee assets that remain stranded outside the country.
To deal with surplus rupees, India has suggested foreign countries invest in its government bonds and bills.
RBI Governor Shaktikanta Das in an interview to the Central Banking magazine published last week said, “Internationalisation is a process – we don’t look upon it as an event or a target that has to be reached by a particular date.”
India’s efforts at pushing rupee payments for trade has drawn inevitable comparisons to China’s attempts to internationalize the yuan. The country is seen as a counterweight in the Indo-Pacific by the United States to China’s growing influence.