Internationalising The Rupee Without The ‘Coin Tossing’

  • India must pursue reforms confidently to internationalise the rupee, which will result in a number of benefits

History of Indian Rupee’s internationalisation

  • In the 1950s, the Indian rupee was legal tender for almost all transactions in the United Arab Emirates (UAE), Kuwait, Bahrain, Oman and Qatar
    • The Gulf monarchies purchased rupees with the pound sterling.
  • In 1959, Reserve Bank of India (Amendment) Act was launched to mitigate challenges associated with gold smuggling
    • This enabled the creation of the “Gulf Rupee”, with notes issued by the central bank for circulation only in the West Asian region. 
  • However, by 1966, India devalued its currency, eventually causing some West Asian countries to replace the Gulf rupee with their own currencies.
  • Flagging confidence in the Indian rupee’s stability combined with an oil-revenue linked boom, slowly led to the introduction of sovereign currencies in the region.
  • The demonetisation of 2016 also shook confidence in the Indian rupee, especially in Bhutan and Nepal.
  • The move, in 2023, to withdraw the ₹2,000 note has also impacted confidence in the rupee.

The Rupee is far from being Internationalised

  • The daily average share for the rupee in the global foreign exchange market hovers around ~1.6%, while India’s share of global goods trade is ~2%.
  • India has taken steps to promote the internationalisation of the rupee
    • Enable external commercial borrowings in rupees
    • Push to Indian banks to open Rupee Vostro accounts for banks from Russia, the UAE, Sri Lanka and Mauritius
    • Measures to trade with ~18 countries in rupees
  • However, such transactions have been limited, with India still buying oil from Russia in dollars. 
  • Ongoing negotiations with Russia to settle trade in rupees have been slow-going, with Russia expected to have an annual rupee surplus of over $40 billion
  • India does not permit full capital account convertibility 
    • For rupee to be considered a reserve currency, it needs to be fully convertible, readily usable, and available in sufficient quantities.

Way Forward

  • Rupee must be made more freely convertible, with a goal of full convertibility by 2060
    • This would allow foreign investors to easily buy and sell the rupee, enhancing its liquidity and making it more attractive.
  • The RBI should pursue a deeper and more liquid rupee bond market
  • Indian exporters and importers should be encouraged to invoice their transactions in rupee
  • Additional currency swap agreements (as with Sri Lanka) would further allow India to settle trade and investment transactions in rupees
  • Tax incentives to foreign businesses to utilise the rupee in operations in India.
  • The RBI and the Ministry of Finance must ensure currency management stability and improve the exchange rate regime. 
  • More demonetisation (or devaluation) should be avoided
  • A push for making the rupee an official currency in international organisations can be made, thereby giving it a higher profile and acceptability. 
  • The Tarapore Committees’ (in 1997 and 2006) recommendations must be pursued including
    • a push to reduce fiscal deficits lower than 3.5%
    • a reduction in gross inflation rate to 3%-5%
    • a reduction in gross banking non-performing assets to less than 5%.

Conclusion

  • The government’s road map for further internationalisation of the rupee will make it easier for Indian businesses to do business/invest abroad and enhance the rupee’s liquidity, while enhancing financial stability. 
  • It will also benefit Indian citizens, enterprises and the government’s ability to finance deficits. 
  • It is a delicate balance to trade off rupee convertibility for exchange rate stability. 

History of Coinage in India

  • Punch Marked Coins:

    • Issued between the 7th-6th century BC and 1st century AD.
    • First documented coinage.
    • These coins are called ‘punch-marked’ coins because of their manufacturing technique.
    • Mostly made of silver, these bear symbols.
    • They are broadly classified into two periods:
      • The first period is attributed to the Janapadas or small local states.
      • The second period is attributed to the Imperial Mauryan period.
    • The motifs found on these coins were mostly drawn from nature like the sun, various animal motifs, trees, hills etc.

  • Dynastic Coins:

    • Indo Greeks:
      • Hellenistic traditions characterise the silver coins of the Indo-Greeks, with Greek gods and goddesses figuring prominently, apart from the portraits of the issuers.
    • Sakas:
      • The Saka coinage of the Western Kshatrapas are perhaps the earliest dated coins, the dates being given in the Saka era which commences in AD 78.
      • The Saka era represents the official calendar of the Indian Republic.
    • Kushans:
      • Oesho, also known as Shiva, the moon deity Miro, and Buddha were all depicted on the currency of the Kushan people, who originated in the Central Asian region.
      • Earliest Kushan coinage is generally attributed to Vima Kadphises.
      • The Kushan coins generally depicted iconographic forms drawn from Greek, Mesopotamian, Zorastrian and Indian mythology.
      • Siva, Buddha and Kartikeya were the major Indian deities portrayed.
    • Satavahana:
      • The dates of their coming into power are contentious and are variously put between 270 BC to 30 BC.
      • Their coins were predominantly of copper and lead; however, silver issues are also known.
      • These coins carried the motifs of fauna like elephants, lions, bulls, horses, etc. often juxtaposed against motifs from nature like hills, tree, etc.
      • The silver coins of the Satavahanas carried portraits and bilingual legends, which were inspired by the Kshatrapa types.

Foreign Coins:

    • British Coins:
      • The British East India Company issued coins in the Madras Presidency that bore the inscription “Three Swamy Pagoda.” These coins featured an image of Lord Balaji in the center, with Sridevi and Bhudevi on either side of him.
    • Other Coins:
      • Ancient India had considerable trade links with the Middle East, Europe (Greece and Rome) as well as China.
      • This trade was carried out over land partly along what came to be alluded to as the silk route and partly through maritime trade.
      • In South India, which had a thriving maritime trade, Roman coins even circulated in their original form, albeit slashed at times as a gesture disclaiming intrusions of foreign sovereignty.