India Boosts Rupee Internationalisation with Trade Policy Reforms
By ThePip Desk
India’s Foreign Trade Policy is amended to allow rupee-settled exports to receive benefits, a strategic move to enhance the global use of the Indian Rupee.
The Indian government has amended its Foreign Trade Policy (FTP) to enable international trade settlement in Indian rupees, a strategic move. This adjustment aims to offer Indian exporters and global partners more flexibility in currency choice.
Expanding Rupee Eligibility for Export Benefits
These changes, notified by the Directorate General of Foreign Trade (DGFT), align the FTP with the existing framework of the Foreign Exchange Management Act (FEMA). The broader goal is to streamline trade and encourage the rupee’s use in global settlements.
A key amendment, effective on Thursday, makes exports to any country (excluding Nepal and Bhutan) eligible for benefits if proceeds are realized in rupees via prescribed banking channels. These benefits include export incentives and fulfillment of export obligations under the FTP, mirroring those for foreign currency settlements.
The initial allowance for rupee-based international trade settlement was introduced in November 2022. This was primarily driven by a significant increase in trade with Russia, which became a major crude oil supplier following the Ukraine war.
Understanding the Path to Rupee Internationalisation
Despite these policy amendments, experts caution that extensive groundwork remains necessary for the widespread internationalization of the Indian currency. Several challenges currently impede broader global adoption.
The rupee’s non-convertibility in the current account means overseas banking institutions do not typically hold it, complicating acquisition for importers. Furthermore, exporters often prefer receiving payments in international currencies to benefit from depreciation and leverage hedging mechanisms.
For the rupee to achieve greater adoption in global trade, India may need to secure bilateral agreements with key trading partners. Collaboration with economic blocs like BRICS nations could also establish smoother transaction mechanisms.
China’s yuan internationalization model involves swap agreements with over 40 central banks. It also utilizes the Cross-Border Interbank Payment System (CIPS) for cross-border yuan transactions.
Officials acknowledge that the internationalization of the Indian rupee will inherently be a slow and gradual process. This journey comes with its own limitations.