Seventy years ago, the Indian rupee was a common sight in sheikhdoms across the Arabian Sea, even after India gained independence from Britain. Until 1970, some countries used the Gulf rupee, which was issued by India’s central bank. However, today, the rupee only accounts for less than 2% of international-currency transactions, despite India having the world’s fifth-largest economy. Narendra Modi, India’s prime minister, wants to see the rupee regain its global presence.
At the 90th anniversary of the Reserve Bank of India on April 1st, Mr. Modi urged policymakers to focus on improving the accessibility of the rupee. While national leaders like Mr. Modi often express enthusiasm for the idea of their currency becoming global, the necessary reforms are often lacking. Reforms are imperative to make a currency truly global.
The history of the Indian rupee’s international usage dates back to India’s colonial past. During British rule, the Indian rupee was widely circulated across the British Empire. Even after India gained independence, the rupee continued to be used in trade with other countries. However, as the global financial landscape evolved, the rupee’s international presence waned.
Over the years, various factors have contributed to the decline of the rupee as a global currency. The rise of the US dollar as the dominant global reserve currency, along with India’s restrictive exchange controls and limited capital account convertibility, have hindered the rupee’s internationalization efforts. Additionally, concerns about currency stability, inflation, and political uncertainty have also impacted the rupee’s standing in the global market.
In recent years, India has taken steps to promote the international use of the rupee. The introduction of the Masala bond, a rupee-denominated bond issued outside India, was a significant milestone in this effort. The Reserve Bank of India has also signed currency swap agreements with several countries to facilitate trade and investment in rupees. These initiatives have helped increase the visibility of the rupee in international markets.
Despite these efforts, challenges remain in making the rupee a truly global currency. Structural reforms, such as liberalizing capital controls, improving economic stability, and enhancing financial infrastructure, are essential for the rupee to gain wider acceptance in the global market. Policy coordination between the government and the central bank is also crucial to ensure a coherent strategy for promoting the rupee as a global currency.
In conclusion, while the Indian rupee has a rich history as an international currency, significant obstacles must be overcome for it to regain its global presence. With the right reforms and policies in place, the rupee has the potential to become a more prominent player in the international financial system. Narendra Modi’s call for a more accessible rupee is a step in the right direction, but sustained efforts and decisive actions are needed to realize this vision.
