Amazon Pay Payment Gateway: How far is the Indian Rupee's road to internationalisation?

After five years of negotiations, Indian government bonds were formally included in J.P. Morgan's Government Bond Index for Emerging Markets (GBI-EM) on 28 June. This is the first time India has been included in a major global benchmark index, and the market expects the Indian bond market to attract a large influx of foreign investment. However, in the short term, the market may have overestimated the enthusiasm for foreign investment.

On 8 July, Bloomberg, citing data from the Clearing Corporation of India, reported that overseas inflows into the Indian bond market in the first week of July (1-5 July) stood at Rs 35.9bn ($430m), down 23% from Rs 46.6bn the previous week.

The inclusion of Indian government bonds in the GBI-EM marks the latest milestone in the internationalisation of the Indian rupee. In July last year, the Reserve Bank of India (RBI) put the internationalisation of the rupee on the agenda and released its first roadmap for the internationalisation of the rupee, which included targets such as the inclusion of Indian government bonds in global bond indices. In the long run, the Indian government hopes that the rupee will enter the International Monetary Fund's (IMF) Special Drawing Rights (SDR) currency basket, an international reserve asset created by the IMF to supplement the official reserves of member countries.

Outside India, the rupee is also legal tender in Nepal and Bhutan. However, outside these countries, the acceptance of the rupee is limited, with the rupee accounting for less than 21 TP3T of international currency transactions, which is inconsistent with India's position as the world's fifth largest economy.

The Russian-Ukrainian conflict that erupted in February 2022 provided a significant opportunity to internationalise the Indian rupee. In the aftermath of the conflict, Russia faced Western sanctions and was excluded from the international payment system SWIFT. India, which maintained a neutral stance in the conflict, used the opportunity to establish a rupee-rupee trade payment mechanism with Russia, importing large quantities of Russian oil and arms in rupees. According to India's trade ministry, India's imports of Russian energy grew by nearly 5,301 TP3T year-on-year in April 2023 alone.

However, it was not long before the Russians realised that this mechanism was not working. Since Russia's exports to India far exceeded its imports and the rupee was not fully convertible on the international market, Russia had accumulated a large amount of Indian rupees that it could not spend. In May last year, Russian Foreign Minister Sergey Lavrov publicly stated that Russia had accumulated billions of rupees in Indian banks that could not be spent and needed to be converted into other currencies.

The mechanism that failed to work in Russia seems to have made a breakthrough in the United Arab Emirates (UAE), which has a more complementary trade structure. In July last year, India signed an agreement with UAE to allow trade settlement in rupees. India started buying UAE's oil and gold in rupees, while UAE bought Indian gems and jewellery in rupees.

The Government of India wants to extend the UAE model of co-operation to other oil trading countries. In addition, India is in talks with Thailand to get the rupee recognised by the Thai government. Thailand is one of the favourite holiday destinations for Indians.

In April this year, at the 90th anniversary celebrations of the Reserve Bank of India (RBI), Prime Minister Narendra Modi called for efforts to enhance the rupee's global acceptability and usability.

However, analysts believe that the internationalisation of the Indian rupee will remain a long-term vision without the support of international trade advantages. Due to the lack of global competitiveness of "Made in India" products, coupled with a lack of domestic demand and frequent export bans, the share of Indian goods in the global market is low. According to the World Trade Organisation, India's total exports and imports will be about $1.1 trillion in 2023, ranking 14th globally and accounting for 2.31 TP3T of global trade.

"For a country's currency to gain global recognition, it needs to demonstrate progress in its democratic institutions and economic policies. While India is well-positioned on these fronts, the road to the internationalisation of the rupee is still long," Brajesh Kumar Tiwari, an associate professor at Jawaharlal Nehru University, wrote in a recent op-ed.