Internationalisation of rupee will help lower transaction costs, reduce dependence on dollar, says expert

The Indian government and the Reserve Bank of India (RBI) have been actively working towards establishing the Indian rupee as a global currency. One of the primary driving factors behind this endeavour is India's impressive economic growth, poised to make it the third-largest economy by the end of the decade, thereby strengthening the case for international recognition of the rupee.

G Padmanabhan, Former Executive Director of RBI, believes that the internationalisation of the rupee will yield several benefits, including reduced cross-border transaction costs and a decrease in reliance on the US dollar. The measures implemented by the RBI and the government thus far are seen as crucial steps in paving the way for the rupee's integration into international trade transactions.

The current geopolitical climate, such as sanctions against Russian entities and the impounding of Russian dollar reserves, has sent ripples through emerging markets like India, which hold significant dollar reserves. This realisation underscores the need for diversifying currency usage to avoid vulnerabilities resulting from the weaponisation of the dollar.

However, Arvind Panagariya, Professor of Economics at Columbia University, offers a different perspective, stating that for the rupee to become an international currency, India must further open up its economy and substantially increase its trade. He draws a parallel with the Chinese Yuan's inclusion in the Special Drawing Rights (SDR) basket, suggesting that India can aspire to a similar status in the future.

Nevertheless, Panagariya emphasises that India's trade volumes must significantly expand to achieve this goal.

In recent developments, the Indian government has taken steps to connect India's Unified Payments Interface (UPI) with payment systems in other countries, enabling seamless cross-border retail payments. Additionally, India has signed agreements with countries like the UAE and Malaysia, aiming to promote the usage of local currency in trade transactions.