Importance of Internationalizing The Indian Rupee Currency And Its Challenges

India in recent times, especially after starting the Russia-Ukraine war, has been actively working towards internationalizing the Indian Rupee currency [INR]. The Indian government has aimed to encourage more countries to use the INR in various international transactions.

Importance of Internationalizing The Indian Rupee Currency And Its Challenges [Credit-Linkedin]

The government of India, however, gained some success with their strong efforts but there have been a lot of challenges, particularly in crucial sectors such as oil trade.

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Importance of Internationalizing the Indian Rupee Currency:

There are several reasons that derive India's push to internationalize the rupee currency. One of the prime factors is the need to facilitate trade with sanctioned countries like Iran, Venezuela, or Russia. These countries are UN or US-sanctioned and the use of the US dollar is restricted.

Using the rupee as an international currency helps reduce pressure on India's foreign exchange reserves, especially when the country has substantial import bills, like $700 billion spent on imports in the previous fiscal year.

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Challenges in Internationalizing The Indian Rupee Currency:

Despite the positive work and motivation behind internationalizing the rupee currency, notable challenges are hindering its widespread adoption. The first major obstacle is that it is not fully convertible. 

Challenges in Internationalizing The Indian Rupee Currency [Credit-Samvada World]

Foreign traders are facing limitations and require government approvals when converting large sums of rupees. This step makes the convertible process less attractive in foreign countries. The second big challenge is what other countries can do with the rupee especially when trade imbalances exist.

India imports oil, a major percentage by the state-owned companies, and does not involve the use of the Indian Rupee as an international currency. It is quite surprise that no crude oil imports have been settled in INR in the last fiscal year 2022-2023.

The Ministry of Petroleum attributes this concern raised by suppliers about the repatriation of funds in the preferred currency. They also raised concerns about the high transactional costs associated with currency conversion.

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Suggestions To Overcome These Challenges:

To overcome these challenges, The government of India can learn from its neighbor China's strategy with the Yuan. Although the Chinese Yuan is not fully convertible yet China has successfully paid its bills for Russian oil.

Chinese approach suggests producing goods that the world wants to buy. It can also enhance the acceptance of a partially convertible currency. 

India can also consider making the rupee fully convertible and allow foreign investors and traders to exchange and use it without any restrictions. According to experts, this move may come with the downside of relinquishing some control over the rupee value. It requires a shift in India's economic strategy.

Suggestions To Overcome These Challenges [Credit-IAS Rau's]

We know that the internalization of the Indian Rupee Currency is a complex process. It requires steps to overcome challenges and find viable solutions. It is important to understand the global acceptance of a currency takes time.

The fundamentals of the Indian economy, strong export base, and cooperative trading partners are and will play pivotal roles in determining when the rupee becomes a more prominent international currency. 

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