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Internationalisation of the Rupee

Context:

In a significant development in the realm of global trade and finance, India has achieved a historic milestone by making its inaugural payment for oil to the United Arab Emirates (UAE) in rupees. This marks a potential turning point in the endeavor to establish the rupee as a prominent global currency.

Relevance:

GS3- Indian Economy- Growth and Development

Mains Question:

In the context of the first-ever payment for oil made by India in rupees to the United Arab Emirates (UAE), explain what do you mean by Internationalisation of Rupee. What are the benefits and challenges that internationalisation of rupee poses for the Indian Economy? (15 Marks, 250 Words).

Internationalisation of Rupee:

  • The internationalization of the Indian rupee involves the systematic effort to enhance the utilization and recognition of the currency in cross-border transactions.
  • This initiative aims to encourage the adoption of the rupee in import-export trade and various current account transactions, with the ultimate objective of extending its prevalence in capital account transactions.
  • The overarching goal is to establish the rupee as a universally acknowledged and embraced currency in the international marketplace.

Current Status of Rupee’s Internationalization:

The internationalization of the rupee remains in its early stages, with the daily average share of the rupee in the global foreign exchange market standing at approximately 1.6%. India’s share in global goods trade is also modest, at just 2%.

Significance of the Recent Transaction between India and the UAE:

Financial LandscapeBeyond strengthening economic ties between India and the UAE, this move carries broader implications for the international financial landscape.  

The groundbreaking transaction occurred within the framework of a trade agreement between the two nations, where India opted to settle the payment for a shipment of crude oil in its own currency instead of the customary US dollar.
Global Trade and Power DynamicsThis departure from the conventional practice is viewed as a bold step that could have a cascading impact on global trade dynamics.  

The arrangement with the UAE serves as a testament to India’s growing prominence on the world stage. Not only do numerous countries look to India for guidance and support, but they also observe and emulate the paths it charts.  

As External Affairs Minister S Jaishankar aptly noted, the era of a bipolar world has concluded, and we now find ourselves in a multipolar world where several nations play pivotal roles. The decision to make payments in rupees carries not only economic implications but also reinforces the economic and strategic bonds between India and the UAE.  
Diversifying its Currency ReservesIndia’s decision to conduct transactions in rupees aligns with its overarching strategy of diversifying its currency reserves.  

Traditionally, the US dollar has held sway as the dominant currency in international trade. By choosing the rupee, India is taking a proactive measure to lessen its dependence on the dollar and foster the utilization of its own currency.  
Minimise the Effect of Exchange Rate FluctuationsTrading in local currencies presents advantages, including a reduction in currency exchange risks. By bypassing the need for conversions into a third-party currency like the US dollar, both India and the UAE can potentially cut transaction costs and minimize exposure to exchange rate fluctuations. This move may inspire other countries to explore similar arrangements, challenging the enduring dominance of the US dollar in the international financial system.  

The payment made by India to the United Arab Emirates (UAE) in rupees for oil signifies mutual confidence in their respective economies and establishes a precedent for other nations to consider alternative currency options.  

Persisting Challenges:

  • However, it is essential to note that this doesn’t imply that the Indian rupee is on par with the dollar. The US dollar has long been the predominant currency in global trade, constituting nearly 60% of all foreign exchange (Forex) reserves and over 80% of global forex trading.
  • The rupee is not as widely traded as the US dollar or the euro, which may impede its immediate adoption on a large scale.
  • Additionally, concerns about the stability of the rupee and the necessity for a robust financial infrastructure must be addressed for the currency to gain broader acceptance.

Conclusion:

Despite these challenges, this shift signifies a change in the traditional dynamics of international trade and finance. The global financial landscape may witness further diversification in currency usage, challenging the supremacy of the dollar and contributing to a multipolar world economy.


March 2024
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