India takes small, steady steps towards rupee's internationalisation

The beginning of what could be a multi-decade journey has been made. It will be a slow, consistent process, not a hasty one that may cause disruptions

Since January 2026, the monthly Reserve Bank of India (RBI) Bulletin, brought out by the central bank’s Department of Economic and Policy Research, started featuring two tables on the invoicing and settlement of the country’s total exports and imports in rupees. While the share of India’s total international trade that is settled in rupees stands at just around 5 per cent, the figure points to a move that can, over a period of time, transform the way the country does business with the rest of the world.

 

After Russia invaded Ukraine in February 2022, the United States not only froze all of Russia’s dollar assets, but also barred it from using SWIFT and blocked its access to the dollar payment and settlement system centred in New York. SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a secure global messaging network used by financial institutions across at least 200 countries to transmit instructions for international money and security transfers. 

This led many countries, including India, to start exploring alternatives to the dollar and dollar-dominated payment and settlement system. The RBI set up an inter-departmental group (IDG), headed by Executive Director Radha Shyam Ratho, to prepare a roadmap for the internationalisation of the rupee. Its report, published in July 2023, is the first official public policy research on the subject. 

Going by the IDG report, with the global order being rebalanced, the focus has to be on self-reliance. Against this backdrop, the rupee’s internationalisation assumes urgency. On April 1, 2024, Prime Minister Narendra Modi, in his address at the RBI@90 commemoration function in Mumbai, said the rupee should be accessible and acceptable throughout the world – in effect sending a signal to the central bank to continue with its work on the rupee’s internationalisation. 

The IDG report has laid out the roadmap with 10 short-term, five medium-term, and one long-term milestones to track and monitor the progress in this direction.

 

A key recommendation was to enter into local currency arrangements with trading partners to enable the invoicing, payment, and settlement of exports and imports, either in rupee or the currency of the trading partner. What’s the benefit of such an arrangement? Among others, it limits the exchange rate risk for the exporters of the country in whose currency the invoicing is done. And, of course, it skirts the demand for hard currencies in both countries.

 

Hard currencies are highly stable, liquid, and universally accepted currencies, issued by nations with strong and stable economies. Considered safe havens, since they hold their value, such currencies are widely used in international transactions. The primary hard currencies are the US dollar, euro, Japanese yen, British pound sterling, Swiss franc, Canadian dollar, Australian dollar, and New Zealand dollar. Singapore dollar, Hong Kong dollar and Swedish krona are considered secondary hard currencies.

 

Since July 2023, the RBI has signed memoranda of understanding (MoUs) on local currency arrangement with the central banks of the United Arab Emirates, Indonesia, the Maldives, and Mauritius. Similar MoUs are in the works with several other central banks.

 

Under the local currency arrangement, the payments for and settlement of trade in local currencies happens through the special rupee vostro accounts (SRVA) in India and similar accounts in partner countries. Incidentally, 83 banks from 35 countries, including banks from advanced countries such as Germany and the UK, have opened SRVA accounts with Indian banks.

 

To encourage our exporters to invoice their trade in rupee – and not dollar –  the IDG recommended that equal incentives should be given to Indian exporters, irrespective of whether the exports are invoiced in rupee or dollars. The government has already made equal incentives available to Indian exporters who invoice in rupee.

 

According to the latest RBI Bulletin (February 2026), between April and December 2026, 6.08 per cent of the export of goods and software, and 4.82 per cent the import of goods from/to India were invoiced in rupee in the first nine months of FY26 (April-December). For settlement in rupee, the figures were 2.84 per cent and 2.36 per cent, respectively.

 

For this period in FY25, exports and imports invoiced in rupee were 5.84 per cent and 4.18 per cent, respectively; and settlements were 3.17 per cent and 1.64 per cent, respectively.

 

The figures might be small, but they mark the beginning of what could be a multi-decade journey. The IDG had pointed out that the process of the internationalisation of the rupee would take a few decades, as more and more enabling conditions are met.

 

Some of the conditions it mentioned are: Strengthening Indian financial markets by making them more liquid and deep; simplifying the process for foreign portfolio investments to invest in Indian bonds; and the inclusion of Indian government bonds in global bond indices.

 

In mid-January, Bloomberg Index Services put off including Indian bonds in its flagship Global Aggregate Index. We will get to know about its next course of action later this year. But the fact remains that Indian sovereign bonds have been steadily finding their way into major emerging-market benchmarks. The JPMorgan Emerging Market Local Currency Index included them in June 2024, followed by the Bloomberg Emerging Market Local Currency Bond Index (January 2025), and the FTSE Russell Emerging Market Index (September 2025). 

Overseas transactions in rupee will also require that resident and non-resident Indians (NRIs) be able to pay and receive in rupee and other currencies. To enable this, the IDG report recommended that banking services in rupee should be allowed outside India through off-shore branches of Indian banks. NRIs are now allowed to open such rupee accounts. The RBI has gone a step ahead and recently permitted NRIs in Nepal, Bhutan and Sri Lanka to raise rupee loans from overseas branches of Indian banks.

 

Do the countries that annoy the US run the risk of being debarred from SWIFT and the dollar-dominated global payment and settlement system? That’s a speculation, but if such a thing were to happen, the only way to tackle it is by directly linking Indian payment systems – such as RTGS (real time gross settlement) and SFMS (structured financial messaging system) – with the payment systems of other countries. The IDG report discussed such an arrangement, and work in this direction is on.

 

There are concerns in certain quarters that cross-border transactions in rupee may make the exchange rate more volatile and deplete the foreign exchange reserves, or even render the monetary policy ineffective. These concerns seem to have no basis. An incremental approach towards the internationalisation of the rupee, rather than a big-bang approach, will help allay such fears. For example, the local currency arrangement can be used first for trade, then for non-trade transactions and, finally, for capital account transactions.

 

A similar gradual approach should be followed in opening up financial markets and providing rupee liquidity outside India. The rupee internationalisation phenomenon must be a slow and steady process – not a hasty one that may cause disruptions, leading to a setback.

 

Some of the goals set out in the IDG report – such as including the rupee as a direct settlement currency in the continuous linked settlement (CLS) system, which settles payments in 18 of the most actively traded currencies, or making the rupee part of the special drawing rights (SDR) basket – would definitely require multi-directional efforts spanning a few decades. CLS is a systemically important financial market utility that provides settlement services to mitigate risk in foreign exchange transactions; and SDR is an international reserve asset created by the International Monetary Fund.

 

The currency is the pride of a country -- an expression of its sovereignty. The rupee must aim for a place among convertible and reserve currencies as India aspires to become a developed country by 2047. It’s still a long way away, but the RBI seems to be charting the course for it to happen. 

---

The writer is an author and senior advisor to Jana Small Finance Bank Ltd. His latest book: Roller Coaster: An Affair with Banking. To read his previous columns, log on to www.bankerstrust.in. X: @TamalBandyo