As trade tensions escalate between the United States and India, New Delhi is considering a strategic shift towards greater use of the Indian Rupee in international trade. This move could serve as a crucial tool to mitigate the impact of potential tariffs and sanctions imposed by the U.S., and to assert greater economic independence.
The friction between the two nations has been intensifying, particularly with the recent threats from the U.S. to raise tariffs on Indian goods. These threats stem from concerns over India's continued purchase of Russian oil, despite the ongoing war in Ukraine. The U.S. views this as "fuelling the war machine" and undermining efforts to pressure Russia to end the conflict. In response, President Trump has threatened to "very substantially" increase tariffs on Indian goods, escalating the 25% duty already imposed.
India, however, has strongly defended its position, citing its need to secure affordable energy supplies for its growing economy. New Delhi has also accused the U.S. and the European Union of double standards, pointing out that they continue to import substantial volumes of goods, including energy, from Russia. This has led to a tense standoff, with potentially significant economic and geopolitical consequences.
In this context, the internationalization of the Rupee emerges as a strategic imperative for India. Currently, a significant portion of international trade transactions involving India are conducted in U.S. dollars. This exposes Indian businesses to exchange rate fluctuations and increases reliance on the U.S. financial system. By promoting the use of the Rupee in trade settlements, India aims to reduce its dependence on the dollar and gain greater control over its trade dynamics.
The Reserve Bank of India (RBI) has already taken steps in this direction by establishing a mechanism for international trade settlement in Rupees in July 2022. This allows countries to trade with India using Rupees instead of dollars or other major currencies. Several countries, including Russia, Sri Lanka, Cuba, Luxembourg, and Tajikistan, have expressed interest in this mechanism.
The benefits of Rupee-based trade are manifold. Firstly, it eliminates the foreign exchange risk for Indian businesses, as transactions are denominated in the local currency. Secondly, it reduces the outflow of dollars, which is particularly important when the Rupee is depreciating against the dollar. Some analysts estimate that India could save billions of dollars annually by settling its trade with Russia in Rupees. Thirdly, it could exert long-term influence on regional nations wanting to trade with India.
However, the path towards Rupee internationalization is not without its challenges. One major hurdle is India's trade deficit with several countries. Countries with a trade surplus with India may be hesitant to accumulate large Rupee holdings, as they would need to either invest the money in India or leave it idle in their accounts. Another challenge is the relatively low share of the Indian Rupee in global trade. For the Rupee to become a widely accepted currency for international trade, India needs to increase its exports and make the Rupee more tradable.
Despite these challenges, the push for Rupee internationalization aligns with India's broader goals of achieving greater economic self-reliance and asserting its role as a major player in the global economy. As trade tensions with the U.S. persist, this strategic shift could prove to be a valuable asset for India in navigating the complex landscape of international trade and geopolitics.
