Will the rupee emerge as a global currency?

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currency markets and financing balance of payments. It can also be used as a reserve currency or as capital assets by private players. The process is closely interlinked with the size of an economy and the scale of trade.

Currently, the US dollar, the Euro, the Japanese yen and the British pound are the leading reserve currencies in the world. The use of the rupee in cross-border transactions helps the country’s exporters and importers to reduce transaction cost and limit exchange rate risks. It also helps lower the cost of capital due to better access to global financial markets and reduces the need to maintain foreign exchange reserves.

Internationalization could allow the government to finance part of its budget deficit by issuing domestic currency debt in international markets rather than issuing foreign currency instruments. It could also allow the government to fund part of its current account deficit by private capital flows from abroad. RBI has put in place an additional arrangement for invoicing, payment and settlement of trade in rupees through Special Rupee Vostro Accounts (SRVAs).

A total of 18 countries have been allowed to open SRVAs. The Asian Clearing Union has introduced rupee as a settlement currency. And Sri Lanka has formally named the rupee as a designated foreign currency.

The biggest challenge to the internationalization of the rupee is whether or not other countries will actually accept the Indian currency. The rupee is not fully convertible and India’s share of global exports of goods is just about 2%. This reduces the necessity for other countries to hold rupees.