The Indian Rupee Is Carving International Presence; Can Indian Rupee Overstep The Dollar And Manage Its Own?

The Indian Rupee, in December 2022, saw, for the very first time, the settlement of foreign trade with Russia as part of the ‘International Settlement of Trade in Indian Rupee’ mechanism initiated by the Reserve Bank of India (RBI) in July last year.

The US dollar has remained central to the international economy. It is the currency mainly used for international trade, and this gives the USA umpteen benefits, one – making borrowing money abroad easier, and second – expanding the scope of financial sanctions by the USA. 

But for any country and its citizens, the measurement of the nation’s strength can be accurately gauged by how strong the passport is and its currency. 

There is something to be said about being able to travel visa-free and having the option of being able to use the nation’s currency abroad, and hence although small steps in this direction, India’s reserve bank is working to internationalize the rupee. 

It has done so by starting with business transactions. To this effect, the first two countries that made this switch and accepted the Indian rupee were Russia and Sri Lanka and settled trade transactions in the Indian rupee.

However, the good news is that it is not limited to just these two countries; more countries have signed up – Mauritius, Malaysia, Singapore, Myanmar, Israel and Germany; they all made arrangements to make payments in the Indian rupee. 

In order to do so, all of these countries have opened special accounts, and they’re ready to trade in the Indian Rupee.

So here’s the next question, how does this help India? 

1) It can help India manage its foreign reserves better. Instead of using the dollar, the rupee is being put to use; hence there’s no need to dip into reserves. 

2) It helps India protect its economic interests; the best example to illustrate this is by taking the example of Russian oil. 

Needless to say, India needs Russian oil to secure its energy interest, although the west wanted to block it since it wanted to curb Russian oil exports. 

But herein is the question – how would the west be able to do so?

Simply because of its dominance in the international financial system, most global trade is done in dollars, and payment gateways are controlled by the west so that they can influence trade.

However, India found a way to work around this, it bypassed these curbs by using the rupee, and this arrangement also incentivizes foreign exports because Indian exporters continue to have access to markets like Russia.

3)The rupee is now gaining wider acceptance and is now being used to settle international trade. 

Which Currency is Mainly Used for International Trade?

Well, it will have to be said that the United States dollar or the euro is used by 20 out of 27 member states of the European Union, and they make up what’s called the eurozone. Even the yen of Japan, to some extent. 

These are major economies, and they all have internationalized currencies. If India wants to join this club, the rupee must go global, and it should become the reserve currency for international trade. 

But on the whole, it is the US dollar for many transactions of an international nature; the US dollar is the primary currency of choice, whether you open a Demat account to invest in the US or any other international stock and even to fund travel abroad. 

Why the US Dollar?

Forex trading online with the primary currency as the US dollar is not the main reason that makes it the currency of choice for trade or any other global financial operations. 

The US dollar is the most widely utilized currency in global trade, even though an exchange may occur among countries where it is not the national currency. This is due to the fact that the US dollar is the single unit in which different countries around the globe express exchange rates. 

Hence, the currency which is mainly used for international trade is unmistakably,  the US dollar since several countries worldwide maintain their respective official rates of exchange through the purchase and sale of the US dollar. Countries hold dollars as the primary currency of their reserve quota. 

Countries And Their Reserves

It is the practice of many countries to hold reserves for several reasons. These are stored as foreign currency (usually the most solid currency of global recognition) to hedge economic crises, make payments for imports, pay off debt, and act as a moderator for a country’s own money. The official currency countries hold as reserve currencies for international trade to and from their countries is the US dollar. 

US Dollar – The Currency Force

The International Monetary Fund, or the IMF, is the only body that is responsible for tracking the world’s monetary systems. It recognizes the US dollar as the most crucial reserve currency.

Conclusion: However, it goes without saying that if the Indian rupee goes global, it is not to say that there aren’t any risks, as this arrangement exposes the rupee to more external shocks. 

Despite this, India must press on. If India wants the rupee to become a global currency, it must be internationalized.

The Indian rupee is going global, and more and more countries are signing up to trade in the rupee, which means it reduces our reliance on the dollar and gives wider acceptance to the Indian currency.