Rupee far from being a global currency
What started as an effort to facilitate crude oil imports from Russia amid fear of sanctions from the US and Europe, the idea of using local currency—the rupee— for bilateral trade has now taken the shape of a narrative that rupee could soon become a ‘global’ currency. Those pushing this narrative are probably too unaware of the ground realities or doing it deliberately. After all, who wouldn’t like to weave a positive story—however far-fetched it may be in reality—about the country? But beyond the euphoria and a PR exercise, one must not lose sight of ground realities: the rupee as a global reserve currency is too far away from reality.
To the government’s credit, it has probably taken steps to internationalise the rupee and push rupee invoicing in international trade. The RBI and the Centre nudged Indian banks to open special rupee vostro accounts of banks from Russia, UAE, Sri Lanka, Mauritius, etc. But there have been no or very few transactions in those accounts. India is still buying Russian oil in dollars. Suppliers of imported goods don’t accept rupee as they cannot use this in the international market. Talks to internationalise the rupee are not new. In the 1960s, the currency was regarded as the official currency of countries like Kuwait, Bahrain, Qatar, United Arab Emirates (then the Trucial States) and even Malaysia. Called the Gulf rupee, it was, however, slowly replaced by local currencies. For the Indian currency to become a global economy, it should have global acceptance. But the rupee’s daily average share in the total foreign exchange market turnover is just 1.6% (up from 0.9% in 2007). Compare this to the US dollar, which accounts for 88% of turnover, followed by the euro (31%), yen (17%) and pound sterling (13%).
India does not allow full capital account convertibility—its currency cannot be freely exchanged with other currencies. One cannot even take more than $250,000 out of India without RBI approval. The reasons are a fear of short-term mass exodus of capital and massive exchange rate volatility. With India running significant current and capital account deficits, the fear of flight of capital in India is very high. And while we can push for the rupee’s acceptance in international trade, we have to do a lot more groundwork to make the rupee a global currency.