• It involves promoting the Rupee for trade transactions such as imports, exports, and eventually extending to financial investments and reserves in foreign countries.
• India has begun steps such as liberalizing FEMA regulations to allow residents outside India to open INR accounts abroad and settle transactions using the Rupee.
• The goal includes reducing dependence on foreign currencies like the US dollar and Euro in global trade with India.

• The Rupee is not fully convertible in the capital account, limiting its widespread international use.
• Global daily foreign exchange market share of the INR is only about 1.6%, limiting liquidity.
• Perceptions of volatility and stability issues persist due to events like demonetization and note withdrawals.
• Lack of deep liquidity in international forex markets.
• Limited acceptance and trust among global traders and financial institutions.
• The Triffin Dilemma: Balancing domestic monetary policy with global demands on the Rupee can cause policy conflicts.
• Challenges in trade settlements with countries, slow adoption for large-scale transactions.?

• Achieve greater acceptance of the Rupee for bilateral and multilateral trade settlements globally.
• Enhance the Rupee’s share in global forex markets, aiming for full convertibility by 2060.
• Promote the Rupee for international reserves, including efforts at inclusion in IMF's SDR basket.
• Strengthen India's financial markets by attracting more foreign investment denominated in Rupees.
• Facilitate development of 24x7 global INR trading markets and seamless digital cross-border payments.
• Expand Special Rupee Vostro Accounts (SVRAs) and bilateral currency swap agreements.
• Improve India's geopolitical influence through currency diplomacy.?

• Full Convertibility: Transition the Rupee to full capital account convertibility to allow free flow of investments.
• Strong Fiscal and Monetary Management: Maintain fiscal deficits below 3.5%, control inflation between 3-5%, and reduce banking sector non-performing assets.
• Robust Financial Infrastructure: Develop deeper bond markets, international payment systems like UPI adoption abroad, and seamless trade settlement mechanisms.
• Bilateral Agreements: Expand currency swap arrangements and trade agreements facilitating local currency settlements.
• Stability and Confidence: Avoid disruptive monetary decisions like demonetization to maintain trust in the currency.
• Global Market Development: Inclusion in global bond indices, harmonized KYC norms for foreign investors, and creating a continuous linked settlement system.
• Regulatory Reforms: Liberalize FEMA (Foreign Exchange Management Act) regulations to encourage use of Rupee accounts abroad for cross-border trade and finance.

• Reduce Dependency on Foreign Currencies: Reliance on the US dollar and other foreign currencies for trade and finance exposes India to exchange rate risks and global market volatility. Internalizing the Rupee helps to diminish this dependence.?
• Enhance Monetary Sovereignty: It allows India to exercise greater control over its monetary policy without being heavily influenced by external currency fluctuations, thus safeguarding its macroeconomic stability.?
• Cost Reduction in Cross-Border Transactions: Using the Rupee for international trade payments and settlements can significantly lower transaction costs, making Indian exports more competitive and imports cheaper.?
• Strengthen India's Geopolitical Influence: By promoting the Rupee as a global currency, India can exercise greater influence over regional and global economic affairs, balancing the global dominance of the US dollar.?
• Boost Economic Growth and Integration: An internalized Rupee could facilitate faster cross-border trade, attract foreign investments in INR-denominated assets, and deepen the integration of India's financial markets with global markets.?
• Fiscal and Reserve Management: It allows more control over India's foreign exchange reserves and reduces the need for large foreign currency reserves to back international transactions.?

• Loans in Rupees to Non-Residents: RBI has allowed authorized dealer banks to extend trade-related loans in INR to residents of neighboring countries such as Bhutan, Nepal, and Sri Lanka. This supports wider use of the Rupee in regional trade and financial transactions.?
• Special Rupee Vostro Accounts (SRVA): RBI expanded the use of SRVAs, foreign banks' accounts with Indian banks to settle trade in Rupees. SRVAs can now be used for investment in corporate bonds and commercial papers, improving liquidity and facilitating Rupee-based international settlements.?
• Transparent Reference Rates: RBI promotes establishing transparent INR reference rates against major currencies of trading partners to enhance the ease of currency conversion and make Rupee settlements more attractive and predictable.??
• Local Currency Settlement Systems (LCSS): RBI has entered agreements with select countries enabling trade settlements in local currencies, including Rupees, reducing reliance on the US dollar and enhancing bilateral trade ties.?
• Promoting Digital Payments: RBI is fostering cross-border payments through initiatives like UPI (Unified Payments Interface) adaptation internationally and the rollout of the Digital Rupee (Central Bank Digital Currency) to enhance international transactions.?
• Regulatory Liberalization: Measures such as permitting rupee accounts for non-residents and easing FEMA rules are taken to incentivize global use of the Rupee and support the currency's internationalization.?

• INR is only partially convertible, especially in the capital account, limiting global traders and investors.
• Perceived exchange rate volatility and past demonetization events have undermined trust.
• The dominance of the US dollar and other major currencies in global reserves and finance is a major hurdle.
• RBI faces the Triffin Dilemma, balancing domestic monetary autonomy with global currency demand.
• Higher capital flight risk and vulnerability to external shocks exist as international use increases.?

• Trade Imbalance: India has a significant trade deficit with Russia, largely due to oil imports. This leads to an accumulation of Indian Rupees in Russian banks’ Vostro accounts in India, as Russia receives more rupees than it spends on Indian exports. Russia finds it difficult to utilize or repatriate these large rupee balances effectively.?
• Rupee Convertibility and Trust: The Rupee is only partially convertible internationally and has limited acceptance globally. Russia preferred to be paid in more stable or convertible currencies like the Chinese yuan rather than holding rupees that are difficult to convert or invest outside India.?
• Currency Volatility and Exchange Mechanism Problems: The tightly controlled and volatile Russian rouble complicates direct exchange mechanisms with the Rupee. Often, conversions had to go through costly dollar intermediations, negating the purpose of direct Rupee trade settlement.?
• Utilization of Bilateral Rupee Balances: Russia faced challenges in using the rupee balances accumulated in India for productive purposes. Limited investment options and lack of avenues to convert or reinvest these rupee funds outside India created a blockage.?
• Sanctions and Payment System Constraints: Western sanctions restricting Russian banks' access to the SWIFT international payment system added operational hurdles. Although Vostro accounts sought to bypass SWIFT, the lack of alternative stable payment infrastructure slowed progress.?
• Suspension of Negotiations: Due to these persistent issues, India and Russia suspended efforts to progress with Rupee-based trade settlements temporarily, signaling a setback in the internationalization of the Rupee via this route.?

• Developing a dynamic exchange rate mechanism for Rupee-Rouble conversions to reduce dependency on dollar conversions.
• Proposals to allow Russian entities to invest rupee balances in Indian government securities, bonds, equities, and infrastructure to utilize accumulated funds.
• Exploring alternative financial messaging systems beyond SWIFT to ensure seamless transaction confirmations.
• Discussions for trilateral settlement arrangements involving third countries (e.g., UAE) to facilitate rupee usage.
• Encouraging Indian banks to push the uptake and operations of SRVAs despite challenges.?

• Despite setbacks, over 90% of India-Russia trade is reported to be settled in Rupees and Roubles, indicating partial success and ongoing efforts to refine mechanisms.
• The issue of accumulated rupee funds remains complex but is being addressed through investment and payment infrastructure innovations.

• Partial Capital Account Convertibility: The Rupee is not fully convertible, particularly in the capital account, which limits its acceptance for international investments and financial transactions beyond trade settlements.?
• Exchange Rate Volatility: The Rupee has experienced considerable volatility, partly due to domestic factors like inflation and policy changes, such as demonetization. This undermines confidence among global traders and investors.?
• Lack of Global Trust and Acceptance: Unlike established hard currencies (USD, Euro), the Rupee lacks widespread trust and acceptance due to its limited global use, lower liquidity, and past financial disruptions.?
• Trade Imbalance Effects: Large trade deficits with countries like Russia cause accumulation of Rupee balances abroad, which are hard to utilize effectively, limiting the utility of Rupee trade settlements.?
• Regulatory and Infrastructure Challenges: Existing legal frameworks (FEMA regulations), payment systems, and financial market infrastructure in India are yet to fully support seamless international Rupee transactions.?
• Dominance of the US Dollar and Other Major Currencies: The entrenched role of the US dollar as the dominant global currency creates strong inertia and resistance to new currencies like the Rupee gaining international status.?
• Geopolitical and Sanctions Risks: Political factors and international sanctions (especially impacting trade partners like Russia) impose constraints on the free use of Rupees across borders.?
• Monetary Policy Dilemma (Triffin Dilemma): Balancing domestic monetary autonomy with the global demand for Rupees can lead to conflicting policy objectives, complicating RBI’s strategy.?

• Gradual Capital Account Convertibility: Move cautiously towards full capital account convertibility to facilitate easier cross-border investments while safeguarding macroeconomic stability.
• Strengthen Financial Infrastructure: Develop deep and liquid foreign exchange markets, improve cross-border payment systems (including digital currencies like the Digital Rupee), and expand transparent reference rates systems for the Rupee vis-à-vis major global currencies.
• Bilateral and Multilateral Currency Arrangements: Expand Special Rupee Vostro Accounts, bilateral currency swaps, and trade agreements with key partners to promote Rupee-based settlements.
• Enhance Trust and Stability: Maintain consistent and predictable monetary and fiscal policies to reduce volatility and build global confidence in the Rupee.
• Promote Investments through Rupee Channels: Enable foreign investors to invest INR balances abroad conveniently and encourage the use of accumulated Rupee balances in foreign markets for development and trade.
• Leverage Digital and Technological Innovations: Promote UPI internationally and expand usage of the RBI’s Digital Rupee for seamless cross-border transactions to reduce dependency on traditional financial infrastructure.
• Address Geopolitical and Sanctions Risks Proactively: Develop alternative payment and messaging systems to circumvent international restrictions and ease geopolitical risks.
• Continuous Dialogue and International Cooperation: Engage in active diplomacy to promote acceptance and usage of the Rupee in international forums and with trade partners.

Download Pdf