Budget 2024: Govt’s Push for Rupee Internationalisation Faces Hurdles, Say Bankers

Finance Minister Nirmala Sitharaman has reaffirmed the government’s goal to make the rupee an international currency. In her budget speech, she mentioned plans to simplify rules and regulations to encourage foreign direct investment (FDI) and overseas investment in India. This aims to increase the use of the rupee for international investments.

Rupee an International Currency

The idea of making the rupee an international currency has been a focus for the government and the Reserve Bank of India (RBI) for several years.

In its annual report released in May, the RBI mentioned steps to internationalize the rupee, such as allowing non-residents to open rupee accounts outside India, enabling banks to lend to non-residents, and facilitating FDI and foreign portfolio investment through special non-resident rupee and vostro accounts.

Challenges

However, turning the rupee into a global currency is challenging. Bankers point out that currencies like the dollar are highly liquid, and countries like the US control a large portion of global trade. Ashhish Vaidya, managing director of DBS Bank India, noted, “These currencies are fully convertible, making it easier and quicker to move large sums of money.

The rupee is not fully convertible on the capital account. Additionally, while India’s trade is growing, it is not yet one of the largest in the world. Significant changes in the financial system and capital account will be needed over time to make the rupee an international currency.”

The RBI has introduced several measures to support this goal. In July 2022, it announced new arrangements for invoicing, payment, and settlement of exports and imports in rupees. Exports and imports can now be priced and billed in rupees, but banks still need prior approval from the RBI before companies can use these facilities.