To mitigate the impact of global issues, India’s Prime Minister Narendra Modi has urged the Reserve Bank of India (RBI) to create a ten-year strategy to make the rupee more accessible and acceptable worldwide. "Today, India is becoming the engine of global growth with a 15 per cent share in global gross domestic product (GDP) growth,” Modi remarked.
As PM Modi makes another fancy speech in the middle of general elections, industry experts have said that it is tough as the Indian rupee needs to be stable and strong, with consistent growth, a low inflation rate, a robust financial system with deep asset markets and a formidable export presence in global markets.
Interestingly, rupee-dollar exchange rates were Rs 47.69 in 2001-02 and Rs 45.46 in 2010-11 registering negative growth of 0.2 per cent on a compound annual growth rate (CAGR) basis. In 2007-08, it was as low as Rs 40.26. From 2011-2024, the exchange rate increased to about Rs 83.0 growing at 4.74 per cent on a CAGR basis.
Despite briefly touching a record low in April, the Indian Rupee largely remained stable for the month, with fluctuations driven by factors such as outflows of funds by foreign portfolio investments (FPIs) and the strength of the US dollar.
Throughout May, it continued to trade within a narrow range of 83.43-83.52 per US dollar, with minimal FPI inflows and demand for dollars from oil companies, according to a report by the Bank of Baroda (BoB). The rupee closed almost unchanged on Friday at 83.50 against the US dollar, mirroring the subdued performance of other Asian currencies.
For India, to stabilise the rupee, it needs to ensure high growth in manufacturing and exports and a trade surplus in goods and services. Experts stated that there is a requirement for a series of structural reforms and to ensure the easement of business and taxation laws.
“The currency of China and Russia could not achieve wider acceptance as reserve currency despite having a trade surplus for many years due to a lack of transparency, the absence of democracy and weak institutions causing a trust deficit among the global fraternity. India is placed far better compared to China but it needs substantial improvement for fascinating global trust,” said RP Gupta, Author and Economist.
India’s Central Bank
The RBI had put in place the mechanism for rupee trade settlement with several countries by allowing banks from these countries to open Special Vostro Rupee Accounts (SVRAs) for settling payments.
Notably, banks from 22 countries have opened special rupee vostro accounts in Indian banks to trade in local currency as part of gradual de-dollarisation plans, the ruling party informed the Parliament earlier.
Countries such as Belarus, Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, Bangladesh, Maldives, Kazakhstan and the United Kingdom have opened accounts in Indian banks.
For the Indian rupee to make it big, developing financial markets, enhancing regulatory frameworks and fostering international partnerships are also essential. Incremental rupee convertibility, digital payment promotion and educational campaigns are expected to further support the rupee's global acceptance and accessibility.
However, the recent revisions to currency trading rules by the RBI led to a market panic, highlighting challenges in the Indian financial system. Sanjeev Agrawal, President, PHD Chamber of Commerce and Industry (PHDCCI) said, “The recent revisions reflect a proactive approach to ensure stability in the Indian financial system. By requiring traders to demonstrate currency exposure before participating in derivatives segments, the RBI aims to curb excessive speculation and promote responsible trading practices.”
To address structural weaknesses, experts suggested that ongoing efforts are needed to enhance transparency, strengthen regulatory oversight and improve risk management practices. Additionally, promoting investor education about responsible trading can empower individuals to make informed decisions, contributing to a more resilient financial ecosystem.
“I agree with the RBI for curbing speculative trading of currency futures and/or derivatives and believe in physical-delivery-based transactions. However, sudden shocks may be avoided. Such changes should be gradual after consulting with stakeholders,” added Gupta.
Global Uncertainty
Recent geopolitical tensions, particularly the Russia-Ukraine conflict and subsequent sanctions on Russia have accelerated the global shift towards de-dollarisation. Recognising the vulnerabilities of relying on the US dollar, India has enhanced the rupee's role in international trade by facilitating direct trade settlements in rupees, particularly with Russia and pursuing bilateral agreements for trading in local currencies.
In the middle of geopolitical chaos, India is capitalising on its diplomatic ties, particularly in Asia, Africa and the Middle East, to expand its economic influence.
By promoting the Unified Payments Interface (UPI) as a model for financial innovation and integrating it into diplomatic engagements, the Modi government aims to boost the adoption of the rupee globally.
"The country is strategically negotiating trade agreements that facilitate rupee settlements, enhancing its direct use and contributing to its stabilisation on the global stage. These initiatives not only streamline transactions but also strengthen economic interdependence, positioning India as a leader in digital finance and advancing the international recognition and usage of the rupee,” said Srivatsan Sridhar, Co-founder and Chief Executive Officer (CEO), Skydo, a cross-border payments platform.
According to industry experts, managing currency volatility is vital as both online and offline retailers increasingly engage in cross-border sales. Experts pitched for establishing dedicated currency corridors for trade settlement amongst partner countries to reduce the exchange rate risk most retail businesses face.
“Additionally, promoting the use of various hedging instruments within ecommerce marketplaces could safeguard sellers from adverse currency movements that are extremely rampant these days. Furthermore, Incorporating advanced analytics and AI to predict currency volatility can help ecommerce brands in strategic financial planning,” said Chirag Taneja, Founder and CEO, GoKwik.
International Trade, Domestic Benefits
Now how can India enhance the rupee's international presence? Well, observers noted that increasing the use of the rupee for invoicing and settlements in international trade and encouraging the opening of rupee accounts for non-residents (other than nostro accounts of overseas banks) both in India and abroad.
Moreover, adopting technology to ensure seamless, cost-effective and real-time processing and gross settlement of cross-border rupee transactions aligns with India's recent proposal at the World Trade Organisation (WTO) to reduce cross-border remittance costs from 6 per cent to 3 per cent, aiming to make these payments cheaper, faster, more transparent and accessible.
“Gradually increasing the convertibility of the rupee on the capital account would significantly boost investor confidence by allowing foreign investors and global corporations more freedom in converting large sums of rupees to their home currency and vice versa, thereby making the rupee a more attractive option for international business and investment," mentioned Skydo's Sridhar.
Additionally, exploring the potential for the rupee's inclusion in the Special Drawing Rights (SDR) basket of the International Monetary Fund (IMF), as suggested by the RBI's inter-departmental group last year, would further enhance the rupee's status as a reserve currency and boost its global acceptance.
However, Sridhar added that there are risks to rupee convertibility- increased currency volatility, increased foreign debt and economic shocks that can impact domestic industry and individuals.
To boost the global acceptance of the Indian rupee through enhanced export competitiveness, India needs to diversify exports beyond traditional sectors and forge new trade relationships, particularly with emerging markets. Upgrading the quality of exports to meet international standards is equally important, which means enhancing quality controls and adhering to global certifications.
Infrastructure improvements such as upgrading logistics, ports and transportation infrastructure can reduce the cost and time associated with exporting goods. Fiscal incentives such as tax rebates, subsidies and accessible export financing can also play a significant role in boosting exports.
Providing fiscal incentives such as tax rebates and subsidies, alongside more accessible export financing, will further boost export volumes, industry leaders told BW Businessworld.
“Simplification of export procedures for ecommerce businesses via the development of a unified portal for regulatory clearances can streamline the export process. In addition, promoting ‘Brand India’ with a focus on quality goods and differentiators like artisanal handcrafts can leverage the strengths of the local markets in a global ecommerce setting. Moreover, incentivising them for international sales and facilitating partnerships with global distribution channels can improve India's online retail presence,” added GoKwik's Taneja.
Push For De-dollarisation
Despite the global push for de-dollarisation, it is clear that the dollar is the predominant foreign currency held by central banks across the world. While this has fluctuated up and down over the last 80 years, there is no end in sight to its dominant status.
De-dollarisation by India is possibly subject to many policy interventions. India must have a trade surplus or at least a current account surplus to convert the rupee to an acceptable global currency for trade transactions. That will generate natural demand for the rupee in the currency market and arrest the chronic depreciation of the rupee.
Gupta added that India must arrest the rupee depreciation and attract global capital to meet its infrastructure and productive usage investment needs. "Let’s not seek de-dollarisation till the size of the Indian economy exceeds China's. Failing this, China's currency will dominate over the US dollar, which might be undesirable in the larger interest of the entire globe,” said Gupta.
Transitioning away from reliance on the US dollar, or de-dollarisation, offers benefits such as increased economic sovereignty and reduced vulnerability to external shocks. Overall, it presents opportunities for India to enhance its financial autonomy and contribute to a more diverse global monetary system.
However, Agrawal told BW Businessworld that challenges include the existing infrastructure around the dollar and concerns about alternative currency liquidity and stability.
India can mitigate these challenges by strengthening regional cooperation, enhancing the role of the Indian rupee in international finance, investing in financial technology and collaborating with other emerging economies to develop alternative payment systems.
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