Deeper trade ties will help internationalise the rupee

Source: The post “Deeper trade ties will help internationalise the rupee” has been created, based on “Deeper trade ties will help internationalise the rupee” published in “Indian Express” on 17th November 2025.

UPSC Syllabus: GS Paper 2- Indian Economy

Context: The internationalisation of the Indian Rupee (INR) has gained significant momentum as part of India’s broader strategy to enhance its global economic footprint. The emphasis on deeper trade ties with other countries, especially through local currency usage, is key to this shift. By increasing the role of INR in international transactions, India aims to reduce its dependence on the US Dollar and strengthen its trade position globally.

Current Efforts towards Internationalisation of INR:

1. Increasing Trade with Key Partners: India is focusing on expanding trade relationships, particularly with countries in Asia, Europe, and the Middle East. As trade volume grows, the usage of INR for invoicing and settlement can reduce the reliance on foreign currencies.
2. Initiatives by International Institutions: The International Finance Corporation (IFC) has committed to investing $30 billion in 67 local currencies, fostering trade in the Indian currency. Additionally, the Asian Development Bank (ADB) has forecasted a rise in local currency loans, which will bolster India’s trade with regional partners.
3. RBI’s New Policies: The Reserve Bank of India (RBI) has taken steps to make it easier for businesses to settle transactions in INR. This includes allowing banks to lend INR to people in neighboring countries like Nepal, Bhutan, and Sri Lanka. The RBI has also expanded its Local Currency Settlement System (LCSS) with countries such as the UAE, Mauritius, and the Maldives.

Challenges in the Internationalization of the Indian Rupee (INR):

1. Dependency on Foreign Currencies: Despite efforts to reduce dependence on the US Dollar, India continues to rely heavily on foreign currencies for trade settlements. Over 80% of India’s exports are still invoiced in dollars, which limits the growth of INR in international trade.
2. Imbalance in Trade Basket: The export basket remains heavily skewed towards primary goods and semi-processed items (over 80% of trade). This limits the scope for greater use of INR, as the demand for final goods (which are more likely to be traded in local currencies) is lower.
3. Lack of Awareness and Integration among Exporters: There is a need for greater awareness among Indian exporters about using INR in transactions. Many businesses still rely on dollars due to established international practices and lack of understanding of local currency settlement systems.
4. Challenges in Infrastructure and Payment Systems: India is still developing the payment infrastructure necessary to support widespread adoption of INR. While UPI has made strides domestically, cross-border payment systems that can seamlessly facilitate INR-based transactions remain underdeveloped in many countries.
5. Geopolitical and Market Barriers: The global economic system, dominated by dollar-based transactions, poses significant geopolitical challenges. Many countries prefer to settle trade in dollars for stability and ease of conversion, which may slow the adoption of INR.

Way Forward for the Internationalization of INR:

1. Expanding Local Currency Settlement Systems (LCSS): India must continue to expand LCSS agreements with key trading partners like the UAE, Mauritius, and Maldives. This would allow for more cross-border transactions in INR and reduce reliance on the US Dollar. A focus on regional partnerships through agreements like those with ASEAN countries and the Russian Federation could further establish INR as a regional trade currency.
2. Encouraging More Free Trade Agreements (FTAs): Signing FTAs with more countries would provide a platform for promoting local currency trade, including INR. A focus on industries that export final goods (such as high-tech, processed products) can make INR more attractive for trade invoicing.
3. Technological Innovations in Payment Systems: To streamline cross-border trade, India needs to enhance digital payment systems. The expansion of UPI to international markets, as well as the development of alternatives to SWIFT, such as Russia’s STFM (System for Transfer of Financial Messages), will be critical in facilitating INR-based transactions.
4. Boosting Awareness and Incentives for Exporters: The government should work with export organizations like the Federation of Indian Export Organisations (FIEO) to raise awareness among exporters about the benefits of settling transactions in INR. Financial incentives or subsidies for exporters who use INR in cross-border transactions could encourage adoption.
5. Promoting Diversified Exports: India should focus on increasing the share of processed and finished goods in its trade basket. A more diversified export profile, especially in sectors like technology, pharmaceuticals, and manufacturing, will provide stronger justification for the use of INR in global trade.
6. Long-Term Policy Commitment: A consistent policy commitment towards internationalizing the INR is necessary, with special focus on trade and payments systems. Policies encouraging international companies to hold and use INR will also help improve its acceptability.

Conclusion: To achieve the goal of INR internationalization, India must focus on addressing existing challenges such as dependency on foreign currencies, trade imbalances, and the need for better payment infrastructure. By strategically expanding local currency settlement systems, entering more FTAs, and promoting technological advancements in payments, India can position the INR as a viable alternative to the US Dollar in international trade. If these steps are taken, INR’s global usage could significantly rise, contributing to India’s long-term economic growth and self-reliance.

Question: How will deeper trade ties help internationalize the Indian Rupee? Discuss the current steps and future prospects.