Why It's The Right Time To Internationalise The Rupee

Raghuram Rajan talked about the internationalisation of the rupee in 2013, but did not follow through. The time for it has arrived.

Geopolitics: After the US's freezing of Russian assets — the first time this was done to a nuclear power — almost all the countries outside the Americas and Europe are looking to reduce their dependence on the dollar.

• The rise of China and India — a story that could play out over the next decade — makes the internationalisation of local currencies more and more likely.

• Sri Lanka has no dollars to buy essential goods and supplies. India can rescue it by operating a rupee account with which that country can buy essentials from India. It makes more sense than lending it dollars that it currently cannot repay.

Indian economy: India is the third-largest economy in purchasing power parity (PPP) terms, and could be the fifth largest in dollar terms by next year. It's now right behind fifth-placed Britain.

• Economies that are larger in PPP terms than in dollars are essentially sending out a signal that a dollar converted into local currency can buy more real goods and services than they can in America.

• Overdependence on dollars and investments in US dollar-denominated securities is a political risk that countries like India cannot afford, even though there is little chance that the US will do to India what it did to Russia.

Looking beyond: While the RBI Governor has been pushed to internationalise the rupee because of pressures on the exchange rate, the idea should be sold to many more trade partners.

• These can include the Gulf and ASEAN countries, where the rupee is already traded (both legally and in the hawala markets), and there is a large population of Indians working or settled there who may be interested in rupee assets.

• ASEAN nations have been seeking to integrate themselves into a common financial framework that includes settlement in local currencies. After the US sanctions against Russia, many of them will be open to India’s overtures in this direction.

Bottom line: If the PM, FM, and RBI Governor put their shoulders to the wheel, the rupee can be internationalised regionally, in parts of Asia and Africa, over the next five years.