Room for India's DPI to diversify digital trade, says RBI report

According to Das, in the rapidly evolving technology landscape, balancing financial stability, customer protection and competition will remain the key policy challenge

Digitisation presents an opportunity to hasten internationalisation of the rupee and can make it a currency of choice for cross-border payments, the Reserve Bank of India’s (RBI’s) currency and finance report for 2023-24 has said.

The report, titled, “India’s Digital Revolution” said there is an enormous potential to leverage the country’s Digital Public Infrastructure (DPI) in an open economy setting. It can help expand and diversify digital merchandise and services trade, promote cost-effective remittances, and increase foreign direct investment (FDI) into digital sectors.

“Internationalisation of the rupee is benefitting from the comprehensive and integrated approach and would impart vibrancy to India’s external sector,” it said.

The report noted that though the US dollar remains the dominant currency for international payment transactions, there has been a fall in its share of total allocated reserves from around 71 per cent in 2000 to around 58 per cent in 2023.

Citing the International Monetary Fund (IMF), the report said the rupee, alongside the Brazilian real, the Chinese renminbi, the Russian ruble and the South African rand, have gained significant regional importance. They have also shown a marked increase in their usage in international transactions, exhibiting their potential to internationalise. It highlighted that full capital account convertibility may not be a necessary prerequisite for internationalisation.

The report said anecdotal evidences suggest that the rupee is accepted in Bhutan, Nepal, Singapore, Malaysia, Indonesia, Hong Kong, Sri Lanka, the UAE, Kuwait, Oman, Qatar and the UK, among others.

It mentions several facilitative environments — inclusion of Indian bonds in global indices and settlement of rupee derivatives in foreign currency at GIFT City to internationalise the rupee.

“Going forward, the goal is to globalise the Unified Payments Interface (UPI) such that every other country will have some fast payments system (FPS), either its own or the UPI,” it said.

The report also said that initiatives such as interlinkage of FPSs across economies and central bank digital currencies (CBDCs) are expected to support seamless international transactions, reduce foreign exchange risks and effectively manage global liquidity.

“There exists immense potential in building cross-border interoperable FPS and CBDCs to leverage open economy digitalisation,” it said.

The report added that India’s state-of-the-art DPI has enormous potential for enhancing cross-border trade across sectors like finance, health, education, agriculture and MSMEs.

It added that to fully harness the potential of India’s DPI, there is a need to leverage the framework of One Future Alliance, wherein emerging market economies can share their best practices to hasten the process of digitalisation.