India has recently made a major move towards internationalising its currency, the rupee, by agreeing to trade with the United Arab Emirates (UAE) in local currencies. This agreement follows Russia’s decision last year to sell crude oil to India in rupees after the West imposed sanctions on settlement in dollars. With the UAE being India’s third-largest trading partner, after the United States and China, this move is a significant achievement for India. It showcases India’s ambitions to enhance the acceptance of the rupee in the global economy. While the yuan has not emerged as a serious contender for reserve currency, India aims to position the rupee as a viable alternative for international payments, particularly in the context of the de-dollarisation efforts.
One of the main reasons why India needs the rupee to gain more currency internationally is its mounting current account deficit (CAD). Unlike many other emerging Asian economies, India has not primarily focused on export-led growth. However, if the rupee does not become part of the basket of tradable currencies, India’s rapid economic growth could lead to a strengthening of hard currencies, ultimately hindering its potential growth rate. Therefore, facilitating rupee trade is crucial for protecting exporters against exchange-rate risks.
However, the path to internationalisation for the rupee is not without challenges. Removing capital controls, a necessary step in the globalisation of the currency, is more complex than removing trade barriers, especially considering India’s current stage of development. Typically, countries liberalise their current accounts before freeing up their capital accounts. However, India has become more protectionist in trade while simultaneously nurturing its export ambitions. If manufacturing exports fail to meet the government’s optimistic projections, there could be significant obstacles to relaxing capital outflows.
In conclusion, India’s agreement with the UAE to trade in local currencies is a positive step towards internationalising the rupee. The benefits of this agreement, such as protecting exporters against exchange-rate risks and reducing the cost of capital, outweigh the short-term impacts on exchange and interest rates. However, achieving the full internationalisation of the rupee will require addressing challenges related to capital controls and promoting export-led growth. India’s journey towards making the rupee a truly global currency has just begun, but it holds great potential for enhancing India’s position in the global economy.
