India, in its quest to expand its external sector and promote the internationalisation of its currency, has embarked on local currency trade deals with several countries. This strategic move aims to avoid invoicing every trade in US dollars and establish the Indian rupee as a widely accepted form of payment in global transactions. During a recent visit to the United Arab Emirates (UAE), India successfully negotiated a local currency invoicing agreement for trade with the UAE. This significant development was made possible through an agreement signed between the Reserve Bank of India and the UAE’s central bank. The fruitful discussions during the visit have also prompted India’s finance minister, Nirmala Sitharaman, to propose a similar arrangement for trade with Indonesia. While the deal with the UAE has been sealed, the agreement with Indonesia is still awaiting finalisation. The proposal was put forward during the G20 finance ministers’ meeting in Gandhinagar. Indonesia is currently considering the utilisation of India’s digital payments platform, UPI, to facilitate trade between the two nations. These bilateral trade arrangements carry immense potential for India. In the future, India may even position its currency as one of the most widely accepted forms in collaboration with the International Monetary Fund (IMF).
However, certain challenges need to be addressed in this pursuit. For the Indian rupee to gain stability and recognition alongside major currencies such as the US dollar and the euro, its exchange rate must be carefully managed. The US dollar, with its dominance in the global financial system, serves as the primary reserve currency for international trade. The US dollar’s widespread usage and its role as a global store of value provide considerable advantages. Many countries with trade surpluses conduct their international transactions and keep their accounts denominated in US dollars. However, this dependency on the US dollar also exposes countries to potential risks, as demonstrated by the weaponisation of the currency during times of geopolitical conflicts and sanctions. China, acknowledging the vulnerabilities associated with the US dollar, has taken proactive steps to mitigate its risks. Given China’s substantial global trade volume and economic influence, the country has actively promoted the use of its currency, the renminbi, as a medium of trade. China has also sought to include the renminbi in the IMF’s special currency basket, known as the SDR.
Nevertheless, internationalising a currency comes with certain costs and limitations. A freely exchangeable currency cannot be tied to domestic monetary policy alone, as changes in interest rates will impact the exchange rate through capital flows. If a country that has trusted a particular currency faces depreciation due to the issuing country’s monetary policy changes, it may lead to a loss of value and a withdrawal from that currency, further exacerbating exchange rate pressures. As India continues to expand its global presence and witness growing demand for its products, the goal of achieving widespread acceptance of the Indian currency becomes more attainable. A fully convertible currency that enables Indian travellers to settle transactions worldwide in their currency, similar to the convenience enjoyed by Americans, remains an aspirational objective. However, India must first focus on strengthening its economic prowess, fostering extensive trade partnerships, and ensuring the stability of its currency to realize this vision.
