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Updated: July 24, 2023

Dev Ishaan Agarwal, Shri Ram College of Commerce


During ancient times, the historic civilizations possessed the economic drivers through the barter exchange economy. This Commodity-for-Commodity Exchange system had several drawbacks, the primary being the lack of a standard unit of measurement. Thus the “Evolution of Money” came into the picture. Whenever there is any discussion revolving around the concept of money, the very first thought that comes into the mind of every Indian is the trade-off between the Indian Rupee and the US Dollar. The simplistic reason of US Dollar being taken into comparison with other world currencies is the status of the international currency it achieved after the fall of the Bretton Woods System and the introduction of the Flexible Exchange Rate System in 1977, thereby becoming the “new gold” for the modern economies of the world.

Throughout the post-World War II boom years, the dollar maintained its dominance. According to Boston College professor of political science and international studies Jonathan David Kirshner, the development of the "dollar order" was supported by four factors: the strength of the American economy, the widespread acceptance of the American financial system, the wealth of American financial institutions, and America's preeminent position in world affairs. Following the United Kingdom ($372 billion) and Brazil ($283 billion) in terms of ownership of U.S. Treasury securities as of January 2020, Japan and China each held more than $1 trillion in these assets. Over 61 percent of the world's cash reserves, according to the International Monetary Fund, are stored in dollars due to a lack of plausible alternative currency.

However, with the rise of Multilateralism, there is a decline of US hegemony in recent times. According to Kirshner, the majority of the "pillars" that made the dollar the king of the postwar economy have fallen over time. The American financial system has flaws, which have been exposed by recessions, stock market bubbles, and the global financial crisis. As a result, the United States has lost some of its political hegemony, with many governments and firms choosing to do business with China or Europe. In addition to this, the IT recession badly hit the US economy to the extent that some of the safest banks of the US fall into the trap of collapse, with the Russia-Ukraine War being the source of this dent. These recent geopolitical circumstances have led to an amazing consequence in the form of trade settlement in terms of Indian Rupee across 35 countries, notably Russia and Sri Lanka. This has led some notable economists to even predict that if such structural economic currency changes happen, then in the coming years, the world can witness a miracle of the Indian Rupee becoming the next US Dollar. Is this really possible? Let’s critically evaluate the recent developments and trends and

further elaborate to reach a possible answer.


Tightening of interest rates: In order to battle inflationary pressures in the nation, the US Federal Bank has been raising interest rates. The federal funds rate was increased for the eighth time in a row, and the Federal Reserve announced that it will likely keep doing so going forward. As a result, investors are moving their money to the US in quest of higher profits, which causes the value of major currencies to decline in relation to the US dollar. When compared to early January of the previous year, the rupee was trading about 82.50 to the dollar. Due to this, India's foreign exchange reserves have been hampered, raising the price of imports.

Russia-Ukraine war: The conflict between Russia and Ukraine has increased the cost of commodities around the world, particularly food and oil. Russia, a significant gas provider to Europe, has reduced its gas supply to the continent by over 80%, driving up global prices. Also, the Western countries' sanctions prevented Russian banks from using Society of Worldwide Interbank Financial Telecommunication (SWIFT), which forced India to put up substitute solutions in order to maintain smooth trade with Russia.

Widening trade deficit: The current account balance of India recorded a deficit of $36.4 billion (4.4 percent of GDP) in Q2 2022, up from $18.2 billion (2.2 percent of GDP) in Q1 2022 and a deficit of $9.7 billion (1.3 percent of GDP) a year earlier [Q2 2021–2022]. This was despite an increase in exports. The merchandise trade deficit increased to $83.5 billion in Q2 2022 from $63.0 billion in Q1 2022, which contributed to the current account deficit (CAD),as well as the growth in investment income.

Soaring Inflation: India imports roughly 90% of its yearly oil requirements, hence a depreciating rupee increases the likelihood of imported inflation in India. The RBI increased borrowing costs by 225 basis points in 2022, its most drastic monetary tightening since 2011, in an effort to control inflation that had been beyond its 2–6% tolerance limit for much of the year. The consumer price index, however, dipped below 6% for the first time since 2022 and increased 5.88% YoY in November, a slower rate than the 6.77% YoY growth in October.


One unexpected result of the Russia-Ukraine conflict is that countries like India and China have been forced to stop trading in US dollars, the so-called "reserve currency”, because they could not afford to lose out on the "cheap oil" that Moscow offered due to unilateral US-led Western sanctions against Russia. Additionally, it sparked an Indian initiative to attempt to parity the rupee with other "international currencies" like the dollar. The Indian rupee has been traded internationally before. The Indian rupee was used by countries including Malaysia, Kuwait, Bahrain, Qatar, and the United Arab Emirates (UAE) in the 1960s under the name "Gulf rupee”. They eventually swapped it out for their own unique currency.

Neighbouring nations like Sri Lanka, Bangladesh, and Myanmar seized the chance once India declared its decision to allow the rupee to trade internationally. Instead, they stated a clear readiness to do their trade with each other and potentially with foreign countries in Indian currency. India naturally looked into the possibility before Russia. Close to 35 countries have reportedly expressed interest, at least on a bilateral basis, including major oil-producing countries like Saudi Arabia. Malaysia is the newest nation to enable bilateral trading in Indian rupees.

Businessmen in the two nations will save 50% on transaction expenses if they trade in Indian rupees as opposed to processing payments through a clearing bank in the United States (US), claim banking specialists from Sri Lanka. Sri Lankan High Commissioner Milinda Moragoda recently spoke with India's Reserve Bank of India (RBI) Governor Shaktikanta Das in Mumbai about starting bilateral trade in the Indian currency. Nandalal Weerasinghe, the governor of Sri Lanka's central bank, and Mahinda Siriwardana, the Treasury Secretary, went a step further and "Signalled willingness to consider rupee-debt for restructuring" in a combined presentation to the country's commercial creditors in Colombo.



India has been attempting to internationalize the rupee for many years. The Reserve Bank of India permitted foreign investors to own "masala bonds" in 2013. These bonds were denominated in rupees, making it simpler for overseas investors to purchase and sell such securities. The RBI permitted international investors to trade in futures priced in rupees in 2015. The Indian government started liberalizing the exchange rate mechanism in 2019, which increased the rupee's appeal as a reserve currency. India is becoming a more appealing place for foreign investment as international firms set up offices there to access the country's huge and growing market.

According to data from the RBI, foreign portfolio investments in India surged from $12 billion in 2008 to $80 billion in 2020. The internationalization of the rupee will result in additional opportunities for commerce and investment as India's economy becomes more connected with the global economy. The Reserve Bank of India (RBI) has taken steps to allow international trade to be invoiced in Indian rupees rather than dollars and other major currencies in an effort to reduce the use of the US currency. The RBI established India's rupee trade settlement mechanism in July 2022 in order to pique the attention of more nations given the government's push for the internationalization of the rupee.

The new procedures enable Indian traders to settle their trade invoices denominated in rupees using unique Vostro accounts. For neighbouring nations and those prepared to use the rupee as a foundation currency for trade diversification in their settlement procedures and who are unable to accept payments in US dollars due to Western sanctions, this move can be especially helpful.

Thus, discussions about the use of the rupee settlement mechanism are also taking place in

nations including Tajikistan, Cuba, Luxembourg, and Sudan.


Flexibility to importers and exporters: Benefiting from not having to pay translation fees or worry about the fluctuating dollar are traders from India and other nations that conduct business in US dollars. Also, using rupees would enable Indian importers to purchase cheaper oil. With the start of the Russia-Ukraine conflict, India has been one of the main consumers of Russian oil. India increased its oil imports from Russia from $2.44 billion in April–September 2021 to $19.27 billion in April–September 2022.

Reduce outflow of US dollars: Many economies have found it challenging to reduce inflation because of the dollar's strength in relation to other currencies. Due to their greater reliance on imports and higher proportion of imports with dollar invoices when compared to rich countries, emerging markets are particularly vulnerable to these pressures. Also, India has a significant trade deficit, which indicates that more money is spent on imports than is made through exports. Billing in rupees will prevent dollar outflows, particularly since that the rupee is falling in value versus the US dollar. India purchased Russian items worth $8.3 billion in 2021.

Rupee Trade Settlement: Since commerce is conducted in rupees, RBI won't need to locate INR buyers in order to exchange USD for INR.As a result, it boosts demand for the Indian rupee and generates savings as a result of not having to pay conversion fees to banks. A way to use INR for international transactions instead of dollars and other major currencies is through India's rupee trade settlement mechanism. Payments must be made in a foreign currency by governments for the import and export of goods and services. Being the reserve currency of the world, dollars are used to settle most transactions.

Weak Performance by Other Currencies: After the Russia-Ukraine War, there has been a downfall in the value of the other currencies, the most prominent being the Japanese Yen, which accounts for 17% of the worldwide currency flow. In the past three decades, the Japanese economy has rarely expanded. It also has the highest level of debt in the entire planet. Japan also has the world's lowest birth rate and the greatest percentage of elderly persons in its population, creating a demographic time bomb. Even though the government has let some foreign workers to assist in the problem-solving, there is still fierce opposition to immigration. While other countries hiked the interest rates after the Federal Reserve action, Japan continued to lower its interest rates, further aggravating its indebtedness. Former consultant to billionaire investor George Soros, Takeshi Fujimaki asserts, "There is no reason for the yen to strengthen”.


Economic Size and Stability: The size and stability of an economy are important factors in determining the reserve currency status. As of now, the Indian economy is one of the world's largest, but it faces certain challenges such as inflation, fiscal deficit, and structural issues that can impact its stability. According to RBI report 2021, the after-effects of COVID-19 on India’s economy will be fully recovered until 2035, which is not a very good sign from the economic perspective. Thus, the path of international currency is a jig-saw puzzle which needs to be resolved.

Economic and Political Instability Worldwide: Each of these elements affect the value of the rupee, and they are also susceptible to fluctuation as a result of events like elections, slowdowns in the economy, and geopolitical conflicts. The rupee may become more volatile if demand suddenly increases, becoming much harder for businesses and investors to plan for future trade and commercial operations in India. Another is that the rupee might face competition from the dollar and the pound as it becomes more widely used. The rupee might also experience considerable capital inflows and currency appreciation if it develops too much traction as a reserve currency, which would reduce the competitiveness of exports. Only 1.6% of the overall foreign exchange market transaction is made up of the rupee on a daily basis (up from 0.9% in 2007). This contrasts with the US dollar's 60% share of trades, which is followed by the Euro's 31%, Yen's 17%, and Pound Sterling's 13%.

Inability of full capital account convertibility: Full capital account convertibility is not permitted in India, hence its currency cannot be freely traded with foreign currencies. Fear of a rapid outflow of money and extreme currency rate volatility are the causes. Due to India's substantial current and capital account deficits, there is a great deal of concern about capital flight. Furthermore, while we can try to increase the use of the rupee in international trade, much more needs to be done to establish it as a reserve currency.


India being a democratic nation benefits from widespread trust, and this must be maintained. The largest stock of “private gold” is also held by India; this asset should be used creatively. India has enormous untapped growth potential that has to be unlocked. The big and talented workforce in India needs to be employed in worthwhile, productive endeavours. India has to implement “structural reforms” to lower inflation and increase “global competitiveness”. Given the aforementioned accomplishments, the Indian Rupee may undoubtedly be recognised as a “global and reserve currency”. India needs to alter its rather “pro-weak Rupee” mentality if it wants to boost exports.

Although it is only a minor first step, the rupee is currently a long way from being a reserve currency like the US dollar. The outlook for their bilateral commerce with India will improve as more nations begin billing their exports and imports in rupees. The benefits of the rupee's globalisation may ultimately outweigh the drawbacks. According to our Honourable Finance Minister, Dr.Nirmala Sitharaman, if done strategically, the globalisation of the rupee will be advantageous to India because it will further integrate our economy with the global economy, increase opportunities for trade and investment, and make the rupee more stable and predictable.



1) Priyanka Deo; “Can the Indian Rupee replace dollar as an international currency?”; The

Times of India (February 2023)

2) RP Gupta; “Can Indian Rupee Be a Global and Reserve Currency?”; Business

World (August 2022)

3) “Internationalization Of the Indian Rupee”; Fibre2Fashion Magazine (January 2023)

4) Umang Sharma; “Indian Rupee going global?”; Firstpost (January 2023)

5) Shankkar Aiyar: “Rupee far from being a global currency”; The New Indian

Express (March 2023)

6) Moorthy, Sathiya; “Rupee going global: Acceptable for South Asia?”; Observer

Research Foundation (April 2023)

7) Roos, Dave; “Why is the US Dollar the World’s Currency?”; How Stuff

Works (January 2023)

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