Modi’s push to take Indian rupee global gets off to a slow start

India’s year-old campaign to boost the rupee’s role in cross-border payments has made little progress, according to people familiar with the matter, underscoring the challenges facing countries trying to reduce their dependence on the dollar.

The Reserve Bank of India has allowed more than a dozen banks to settle rupee deals with 18 countries since last year and major oil exporters such as the UAE and Saudi Arabia are encouraging South Asian countries to accept the Indian currency for trade settlements.

But success has been elusive so far as the total volume of local currency trade has been negligible at around 1,000 crore ($120 million) since the project began, according to people familiar with the matter, who did not want to be named because the numbers are not. general. That compares to India’s total merchandise trade of $1.2 trillion in the last financial year.

A Ministry of Finance spokesperson did not return to e-mail for comment.

Moves towards a global rupee are closely intertwined with Prime Minister Narendra Modi’s aspirations to achieve greater global weight for India, as it records one of the world’s fastest economic growth rates and position itself as an alternative to China in post-Covid manufacturing. era.

While India is betting on the internationalization of the rupee to reduce demand for the dollar and make its economy less vulnerable to global currency shocks, some of its policies run counter to these goals. Asia’s third-largest economy remains subject to capital controls and maintains a tight grip on the currency, while chronic current account deficits and a smaller share of global exports — about 2 percent — are other handicaps.

“The prospects for the rupee to become an important international currency are related to India’s economic and geopolitical strength, but also to the openness of its capital account and the quality of its financial markets,” said Eswar Prasad, a professor at Cornell University and author of The Dollar Trap.

The challenges have become more apparent recently as India has struggled to pay the price of increased imports of cheap Russian oil in rupees. Moscow accounted for nearly half of India’s oil imports in May, from less than 2 percent before the invasion of Ukraine, according to data from analytics firm Kpler.

Russia was unwilling to accept the rupee due to fluctuating exchange rates, preferring the yuan or the UAE dirham. But the unbalanced trade relationship between the two countries has forced it to accumulate up to $1 billion a month in rupee assets that are still stuck outside the country.

To deal with the rupee surplus, India suggested that foreign countries invest in their government bonds and bills.

The Russian rupee trap adds $147 billion abroad

But New Delhi has also been cautious in opening up its markets. Recently, it refused to grant tax breaks for trading on international bond platforms that would have facilitated India’s inclusion in global debt indices. Earlier, she withdrew a plan to issue sovereign bonds in foreign markets.

“Internationalization is a process — we don’t view it as an event or a target to be reached by a certain date,” Reserve Bank of India Governor Shaktikanta Das said in an interview with Central Banking magazine published last week.

China comparison

India’s efforts to make rupee payments for trade have inevitably drawn comparisons to China’s attempts to internationalize the yuan. The United States views the country as a counterweight in the Indo-Pacific to China’s growing influence.

Her move also reflects the brewing backlash against the dominance of the US dollar. Brazil and China recently struck a deal to settle trade in their local currencies, trying to bypass the dollar in the process. Even France has begun to complete transactions in yuan.

However, it would be wise to note the differences, not least of which is China’s greater influence in global finance. The Chinese yuan had the fifth largest share as a global payments currency in May at 2.5 percent while the rupee is not even in the top twenty currencies, according to the latest SWIFT data. In terms of global forex trading volume, the yuan has 7 percent to 1.6 percent for the rupee, according to the latest Bank for International Settlements survey.

However, for India, the benefits are not difficult to measure. It mitigates currency risk for Indian companies, reduces the need to hold large foreign exchange reserves as well as making them less vulnerable to external shocks.

“India does not aspire to make the rupee a reserve currency,” said Usha Thorat, former deputy governor of the Reserve Bank of India, in an interview with Bloomberg TV. “India is trying to make the rupee easier to become a currency for transactions and payments.”

However, it may be too early to write off India’s attempts to carve out a larger role for its currency. The country is expected to be the second largest contributor to global growth through 2028, according to the International Monetary Fund.

A report released by the Reserve Bank of India on Wednesday – which does not represent an official view but still contains recommendations for the country’s leaders – indicated steps they should take to push for more international use of the rupee.

Leonard Kwan, Hong Kong money manager at T. Rowe Price Group Inc., said: “A more open capital account, with a large and liquid pool of investable assets would be one of the things to look for to facilitate a potential eventual role as a physical reserve currency.”