India's economic stride strengthening rupee's internationalisation in new global landscape

New Delhi [India], August 15 : With growing global fragmentation, and geopolitical and geostrategic shifts, de-dollarisation plans are gathering currency. On the other hand, BRICS countries are working on reducing dollar dominance in the global financial system by replacing it with a new global currency.
Amidst geo-political crisis, Russia has become India's biggest supplier of crude, and most of the transactions are done in rupee. Commerce Secretary Sunil Barthwal said on Wednesday that Rupee-rouble trade has significantly increased. A total of 53 accounts have been opened for rupee-rouble trade.
"There is good progress in terms of opening up of vostro accounts. Trade inquiries are being made," the secretary said. Vostro accounts enable domestic banks to provide international banking services to clients who have global banking needs.
Will this de-dollarisation and bilateral trades in local currency strengthen Indian rupees? A currency can be termed "international" if it is widely accepted worldwide as a medium of exchange.
The value of a country's currency and its usage to settle global trade are among the key indicators for gauging its strength.
In June this year, Ministers of Foreign Affairs of the BRICS countries met in Russia's Nizhny Novgorod and called on enhanced use of local currencies in bilateral and multi-lateral trades and financial transactions between the member countries. This, once implemented, will give a shot in the arm in the internationalization of the Indian rupee.
The Reserve Bank of India in 2022 put in place an arrangement, allowing transactions in domestic currencies to promote the growth of global trade with an emphasis on exports from India and to bring in increasing interest towards the rupee.
Last year, the government informed the Parliament that banks from 22 countries had opened special Rupee vostro accounts in Indian banks in order to trade in local currency as part of gradual de-dollarisation plans.
Those countries are Belarus, Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, Bangladesh, Maldives, Kazakhstan and the United Kingdom. Any information about addition of countries to the list since then was not available.
Experts widely believe if the mechanism fructifies then it may go a long way in internationalizing the Indian currency rupee in the long run. It is important to note that the US dollar being the reserve currency of almost all countries is detrimental to other currencies, especially in times of sharp volatility in financial markets as it weakens peer currencies.
As per reports, the share of the US dollar in global foreign exchange reserves, has been shrinking since the start of the twenty-first century, falling close to 59 per cent as of the end of December 2021, from above 70 per cent two decades back.
Strengthening the US dollar and subsequent weaking of rupee makes imports costlier, which tend to trigger domestic inflation. Elevated inflation in turn reduces purchasing power in the economy.
Rising costs of imports also increase the current account deficit (CAD). A widening trade deficit is also a contributing factor to the weakening of the rupee.
From Rs 4 during Independence against the then benchmark Pound sterling to around Rs 84 against the US dollar now, the rupee has depreciated by Rs 80 in the past 77 years.
There is, however, a silver lining. Even though the falling rupee may not benefit the entire economy, a devalued currency certainly has its merits as it aids in boosting exports.