INTERNATIONALIZATION OF RUPEE

Meaning: Internationalization of the rupee refers to promoting Indian Rupee’s usage in cross-border trade, investments, and financial transactions without mandatory conversion to a dominant foreign currency like the USD.

Benefits of Internationalization of Rupee

• Reduces Vulnerability: Reducing dependence on foreign currencies (particularly dollar), it will shield the economy from sudden exchange rate fluctuations, currency crises, and inflationary pressures.
• Relieves Forex Reserve Burden: Lowers dependence on holding large USD/EUR reserves, allowing funds to be used for other priorities.
• Reduces Exchange Rate Risks: Shields against currency fluctuations, lowering business costs and supporting Indian firms in expanding globally.
• Enables Deficit Financing: Global acceptance of INR allows the government to raise funds abroad through rupee-denominated bonds.
• Strengthening India’s Financial Markets: Greater global demand for INR increases foreign participation in Indian financial markets, such as bonds and equity bringing in long-term investments.

Challenges in the Internationalization of Rupee:

• Exchange Rate Volatility:It may result in a potential increase in volatility of its exchange rate in the initial stages.
• Limited Global Acceptance:INR is not fully convertible on the capital account, which restricts its usage in global financial markets. 
• Monetary Policy Dilemma or Triffin Dilemma: Creates a monetary policy dilemma, including the Triffin Dilemma, where a country struggles to balance global currency demand with domestic monetary needs.
• Restricted Convertibility: INR is fully convertible in the current account but partially in the capital account limiting its global appeal.
• Regulatory and Documentation Complexities: Stringent KYC norms, inconsistent across RBI and SEBI, act as a deterrent for foreign portfolio investors (FPIs).
• Lack of INR-based Payment Infrastructure Globally: Limited integration of UPI, Real Time Gross Settlement System (RTGS), and RuPay with foreign payment systems restricts cross-border transactions.

Steps Taken:

• Internationalization of Indian Payment Infrastructure:UPI is adopted in Singapore, France, UAE, Sri-Lanka, Bhutan, Mauritius, Nepal etc.
• Memorandum of Understanding (MoU): RBI has signed MoU with the central banks of the United Arab Emirates, Indonesia and Maldives to encourage cross-border transactions in local currencies, including Indian Rupee.
• Strategic Action Plan 2024–25 (RBI): Includes allowing persons resident outside India (PROI) to open INR accounts abroad, permitting Indian banks to lend in INR to PROIs, and enabling FDI and portfolio investment through Special Non-Resident Rupee Accounts (SNRR) and SRVAs.
• Currency Swap Agreements: Singed with more than 20 countries it facilitates liquidity support and trade settlement in local currencies.