The Rupee Long March, Why India’s Cautious Path to International Currency Status is the Right One
In the high-stakes arena of global finance, currency is more than just a medium of exchange; it is a profound symbol of national economic power and international trust. The unassailable dominance of the US dollar, which facilitates the vast majority of global trade and investment even in deals where America is not involved, is a source of both envy and aspiration for rising economic powers. India, now the world’s fifth-largest economy and a key growth engine, is no exception. There is a palpable national ambition, echoed in policy circles and public discourse, to see the Indian rupee ascend to the coveted status of a global reserve currency, joining the ranks of the dollar, euro, pound sterling, and the Chinese renminbi (RMB).
This ambition was subtly advanced last week when the Reserve Bank of India (RBI) announced a series of measured steps aimed at gradually increasing the international use of the rupee. These “baby steps,” as they have been aptly described, include allowing Indian banks to extend rupee-denominated loans to neighbouring countries for trade settlement, expanding special rupee vostro accounts for foreign investment in Indian corporate debt, and establishing transparent reference rates for partner currencies. While these moves signal a clear intent, they also underscore a critical, and often overlooked, reality: the path to creating a global currency is fraught with peril. As argued by Swaminathan S. Anklesaria Aiyar, the dream of full convertibility, while alluring, is a distant horizon. India’s cautious, incremental approach is not a sign of timidity, but of profound economic prudence, learned from the painful lessons of history and the sobering failures of other ambitious nations.
The Allure and the Anatomy of a Reserve Currency
The benefits of having a reserve currency are substantial and form the core of the aspiration. For a country like India, which runs a significant volume of international trade, reducing reliance on the dollar can lead to lower transaction costs for exporters and importers by eliminating the need for constant currency conversion. It would shield Indian businesses from the volatility of the dollar-rupee exchange rate, making long-term planning more stable.
On a macroeconomic level, if other central banks were to hold rupees as part of their foreign exchange reserves, it would create a built-in, stable demand for the currency. This can lower the cost of government borrowing internationally and grant the country what is often termed “exorbitant privilege”—the ability to fund deficits more easily and wield greater influence in global financial institutions. For a nation with superpower aspirations, this monetary sovereignty is a key pillar of strategic autonomy. It aligns perfectly with India’s growing stature and its desire to be a stable pole in a multipolar world economy.
The Prerequisite of Peril: Full Capital Account Convertibility
However, to qualify as a genuine reserve currency, a nation must make its currency largely, or wholly, convertible on the capital account. In simple terms, this means dismantling the capital controls that are currently in place. Individuals and institutions would be free to convert any amount of rupees into dollars, euros, or other hard currencies, and move these funds across borders with minimal restriction.
This sounds like the ultimate expression of a free and confident market economy. But herein lies the existential risk. As Aiyar starkly warns, “an adverse event can cause a huge panicky outflow of dollars.” In a crisis of confidence—whether triggered by a geopolitical shock, a domestic political upheaval, or a global financial contagion—capital can flee the country at an astonishing speed. This would rapidly deplete India’s foreign exchange reserves, which act as a buffer against such shocks. A plummeting rupee would then trigger a vicious cycle: making imports (most critically, oil) prohibitively expensive, fuelling inflation, and forcing the RBI to raise interest rates sharply to defend the currency, thereby stifling domestic economic growth. Only an economy with immense depth, resilience, and massive forex reserves can hope to withstand such violent tides of “hot money” without capsizing.
A Cautionary Tale: China’s Reckoning with the Renminbi
The recent experience of China serves as a powerful and sobering case study. In the early 2000s, China was brimming with justified confidence. It had become the world’s second-largest economy, was running massive trade surpluses, and had amassed a war chest of over $4 trillion in foreign exchange reserves. As part of its preparation for superpower status, Beijing launched an ambitious blueprint to internationalise the renminbi.
The strategy was multifaceted and initially successful. China encouraged the use of RMB in trade invoicing and settlement, built offshore RMB markets in financial hubs like Hong Kong and London, and allowed for limited capital outflows. By the end of 2014, nearly a quarter of China’s trade was settled in its own currency, and the renminbi was added to the International Monetary Fund’s Special Drawing Rights (SDR) basket—a major symbolic milestone that signified its arrival on the global stage.
Then came the reckoning. In 2015, concerns over a slowing Chinese economy and a bursting stock market bubble triggered a massive capital flight. Fearing a devaluation, investors and Chinese citizens alike began moving money out of the country at a scale that threatened to destabilize the financial system. Beijing’s response was swift and revealing: it slammed the brakes on liberalisation. It imposed strict capital controls, cracked down on overseas transfers, and spent hundreds of billions of dollars from its reserves to prop up the renminbi. The grand experiment in opening up was put on hold, demonstrating that even an economic behemoth with vast reserves was not yet resilient enough to handle the full force of global capital markets. China’s dream of a global renminbi was deferred, proving that financial might alone is not enough without deep, transparent, and trustworthy institutions.
The British Precedent: A Thirty-Year Journey of Setbacks
For those who believe that financial sophistication guarantees a smooth transition, the history of the British pound offers another crucial lesson. The United Kingdom, home to the City of London—one of the world’s oldest and most established financial centers—faced a long and humiliating path to full convertibility after the Second World War.
Substantial convertibility was achieved by 1958, but the economy remained vulnerable. In 1976, a devastating run on the pound sterling forced the UK government to seek a $3.9 billion bailout from the International Monetary Fund, a national humiliation for a former imperial power. It was only in 1979, under Prime Minister Margaret Thatcher, that Britain felt strong and confident enough to finally make sterling fully convertible on the capital account. This was a journey that had taken over three decades, marked by repeated setbacks, the re-imposition of capital restrictions, and a painful learning process. If a financially mature economy like Britain, with its deep institutional history, could be brought to its knees by volatile capital flows, the warning for a still-developing India could not be clearer.
India’s Prudent Pathway: The Logic of Incrementalism
In this context, the RBI’s recent measures are not disappointingly small; they are wisely calibrated. They represent a strategy of building the international role of the rupee from the ground up, focusing on areas of natural influence and minimal risk.
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Regional Focus: By enabling rupee loans to neighbours like Nepal, Bhutan, and Sri Lanka, India is creating a natural zone of rupee influence. These countries have deep trade ties with India, and using the rupee can simplify transactions and reduce their dollar dependency. This is a low-risk way to build familiarity and trust in the currency within a controlled geographic sphere.
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Controlled Investment Channels: Expanding the Special Rupee Vostro Accounts (SRVAs) allows foreign partners who accumulate rupees through trade to reinvest those balances in Indian corporate debt. This creates a closed-loop system where rupee holdings can be put to productive use within India, without opening the floodgates to unrestricted speculative flows.
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Building Infrastructure: Establishing transparent reference rates for trading partner currencies is a foundational step. It enhances the credibility and ease of trading in the rupee, making it a more reliable unit of account for international contracts.
This incremental approach allows India to build the necessary financial market depth, regulatory oversight, and macroeconomic stability over time, without exposing the economy to premature and potentially catastrophic risks.
Conclusion: Patience Over Precipitousness
The aspiration for the rupee to become a global reserve currency is a worthy one, reflective of India’s economic progress and its future potential. However, this goal must be pursued with strategic patience rather than nationalistic impatience. The siren call of full convertibility is strong, but the rocks upon which it can wreck an economy are real and have been witnessed in living memory.
The RBI’s measured strategy, championed by voices like Swaminathan Aiyar, is the correct one. It prioritizes the stability of the domestic economy—the foundation upon which all international ambition must be built. For now, and likely for the next few decades, India must continue to walk the path of incrementalism, strengthening its financial system, building its forex reserves, and fostering sustainable growth. The “small steps” of today are not a retreat from the dream, but the only secure way to ensure that the long march of the rupee ends in a triumphant arrival, not a disastrous retreat.
Q&A: Unpacking the Rupee’s Journey to International Status
1. What are the concrete benefits for India if the rupee becomes a major international currency?
The benefits are multi-faceted:
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Reduced Transaction Costs: Indian exporters and importers could invoice and settle trades in rupees, avoiding costly conversions to dollars and shielding themselves from dollar-rupee volatility.
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Lower Borrowing Costs: If global central banks hold rupees as reserves, it creates stable demand, potentially lowering the Indian government’s and corporations’ cost of borrowing on international markets.
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Strategic Autonomy: It would reduce India’s dependence on the US dollar and the US financial system, granting greater monetary sovereignty and influence in global economic affairs.
2. What is “full capital account convertibility,” and why is it considered so risky?
Full capital account convertibility means removing all restrictions on the free flow of money in and out of the country for investment purposes. Individuals and corporations could freely convert unlimited rupees into foreign currency and move it abroad.
The risk is the potential for sudden and massive capital flight. In the event of a crisis or loss of confidence, investors could pull billions of dollars out of India almost overnight. This would rapidly deplete foreign exchange reserves, cause the rupee’s value to collapse, trigger inflation (by making imports like oil more expensive), and force the central bank to raise interest rates sharply, potentially crashing the domestic economy.
3. How did China’s attempt to internationalize the Renminbi (RMB) serve as a warning?
China’s experience in the 2010s is a perfect cautionary tale. Despite being the world’s second-largest economy with massive forex reserves, its move towards liberalization backfired. In 2015, fears of an economic slowdown triggered a panic, leading to enormous capital outflows. China was forced to reverse course, imposing strict capital controls and spending heavily from its reserves to stabilize the RMB. This proved that even an economic powerhouse is vulnerable to the volatility of global capital markets if its financial system and institutions are not fully prepared.
4. What do the recent “baby steps” by the RBI actually do to promote the rupee?
The recent measures are pragmatic, low-risk initiatives:
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Rupee Loans to Neighbours: Allows Indian banks to give loans in rupees to countries like Nepal and Sri Lanka for trade with India, creating a natural regional demand for the currency.
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Expanding Vostro Accounts: Lets foreign partners who hold rupees (from trade surpluses with India) invest those funds in Indian corporate debt, creating a productive outlet for rupee holdings without full liberalization.
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Transparent Reference Rates: Establishes reliable exchange rates for trading partners, making rupee transactions more credible and easier to execute.
5. Why does the article suggest that full convertibility is decades away for India?
Full convertibility requires an economy of immense resilience and depth to withstand massive, volatile capital flows. India’s financial markets are still developing, and its per capita income is relatively low. The historical examples of Britain (which took over 30 years post-WWII) and the recent setback for China demonstrate that this is a marathon, not a sprint. India must first focus on strengthening its economic fundamentals, building deeper and more liquid financial markets, and accumulating larger forex reserves before it can safely take on the risks associated with full capital account convertibility. Rushing the process could lead to a financial crisis that sets the country back decades.
