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RBI steps up rupee internationalisation, eyes faster cross-border payments

RBI Governor Sanjay Malhotra said the central bank is expanding rupee use in cross-border trade and is discussing faster, cheaper international payments with BRICS partners, including possible use of central bank digital currencies.

What happened

Reserve Bank of India Governor Sanjay Malhotra said on Tuesday the RBI is working to increase the use of the rupee in cross-border trade and payments, and is discussing with BRICS countries ways to make international transactions faster and cheaper. Speaking at a FICCI-Indian Banks Association event, Malhotra said a BRICS task force on payments is looking at options including linking payment systems of different countries and the possible use of central bank digital currencies (CBDCs). He said the RBI has already signed memoranda of understanding with the central banks of UAE, Mauritius, the Maldives and Indonesia to promote the use of local currencies in international trade.

Context

The RBI's rupee internationalisation push has moved along two tracks: enabling exporters and importers to invoice and settle in rupees through Special Rupee Vostro Accounts opened by partner-country banks, and coordinating with peer central banks on cross-border payment plumbing. Malhotra cited India's Unified Payments Interface as an example of near-instantaneous payments and said cross-border remittances still take hours or days. Globally, central banks are exploring alternatives to traditional correspondent banking, which is slower and costlier, and the BRICS payments task force is one venue for that discussion. Malhotra separately said the banking sector remains well-positioned, with credit growth of 17-18%, GNPA under 2% and net NPA under 0.5%.

Why it matters

Cross-border rupee use is starting from a very low base against the entrenched dominance of the US dollar. Even incremental progress reduces India's exposure to correspondent-bank fees and to the second-order effects of US sanctions on payment channels, and lowers the transaction cost of Indian trade with partner economies. Linking payment systems and exploring CBDCs matter because they attack the slowest and most expensive part of cross-border commerce — clearing and settlement — rather than only the last-mile customer experience.

Impact for India

  • Exporters and importers: Local-currency invoicing with partner countries reduces the currency conversion spread and hedging cost, especially for smaller ticket sizes.
  • Indian banks: Rising local-currency trade flows widen fee income from correspondent services and treasury operations.
  • RBI: More MoU-based arrangements give the RBI more real-time visibility into cross-border rupee flows and reduce dependence on dollar-clearing infrastructure.
  • Domestic remittance corridor: A working BRICS payment link and CBDC pilot could compress remittance cost and turnaround from days to near-instant.

Key data

Central bank MoUs signed: UAE, Mauritius, the Maldives and IndonesiaFor use of local currencies in international trade
Banking sector credit growth: 17-18%
Gross NPA ratio: Less than 2%
Net NPA ratio: Less than 0.5%
Governor's risk flag: Geopolitical uncertainty and cyber risk

Concepts

Currency internationalisationThe process by which a domestic currency is increasingly used outside its home jurisdiction for trade invoicing, settlement, reserves and asset holding.The RBI's push aims to move the rupee up the ladder — from a purely domestic currency toward one used for cross-border invoicing and settlement, initially with willing partner central banks.
Correspondent bankingAn arrangement where one bank holds deposits for and provides payment services to another bank, typically to enable cross-border transactions.Traditional correspondent banking is the reason cross-border payments take hours or days and are more expensive; the BRICS task force is exploring alternatives that bypass this chain.
Central bank digital currency (CBDC)A digital form of a country's fiat money, issued and settled on infrastructure operated by the central bank.Malhotra flagged CBDCs as one option being discussed in the BRICS payments task force for cheaper, faster cross-border transactions.
Special Rupee Vostro AccountA rupee-denominated account opened in an Indian bank by a foreign bank to settle trade transactions in Indian rupees.MoUs with UAE, Mauritius, the Maldives and Indonesia rely in part on this vostro-account plumbing to make local-currency invoicing operational for traders.

Theory lens

Network externalities and currency dominance — the theory of international currency use holds that a currency becomes more attractive as more parties use it, because deeper liquidity and thicker settlement networks lower each additional user's cost. Under this lens, the RBI's memoranda with the UAE, Mauritius, the Maldives and Indonesia are attempts to build small localised networks where rupee use is convenient enough to overcome the dollar's global network advantage, without needing to challenge the dollar head-on.

Stakeholders

Gains: Exporters to UAE, Mauritius, the Maldives and IndonesiaMoUs with these central banks make local-currency settlement more accessible, cutting FX conversion cost.
Gains: Indian banking sectorMalhotra said the sector is robust with 17-18% credit growth, GNPA below 2% and net NPA below 0.5%, positioning it to absorb new cross-border business.
Gains: RBIWider local-currency use reduces the systemic vulnerability from dollar-clearing bottlenecks.

Practice Question — from the story

With reference to the RBI's cross-border payments and rupee internationalisation work described by Governor Sanjay Malhotra on Tuesday, consider the following statements:

  1. The RBI has signed memoranda of understanding with the central banks of the UAE, Mauritius, the Maldives and Indonesia to promote the use of local currencies in international trade.
  2. A BRICS task force on payments is examining options including linking the payment systems of different countries and the possible use of central bank digital currencies (CBDCs).

Which of the statements given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2
Reveal answer & explanation

Answer: Both 1 and 2

  • Statement 1: Correct — Malhotra said the RBI has signed such MoUs with these four central banks.
  • Statement 2: Correct — the source cites the BRICS payments task force and lists linking payment systems and possible CBDC use among the options under discussion.

Therefore, the correct answer is Both 1 and 2.

Concept check — test your understanding

What is the primary reason a country's central bank actively promotes 'internationalisation' of its own currency — encouraging its use in cross-border trade invoicing and settlement — rather than continuing to rely solely on the US dollar?

  1. It automatically raises the country's sovereign credit rating, because international currencies are assumed to have zero default risk.
  2. It obliges the IMF to include the currency in the Special Drawing Rights basket within a fixed number of years.
  3. It reduces the country's exposure to currency-conversion costs, correspondent-banking bottlenecks and the second-order effects of sanctions imposed through the dollar-clearing system, and creates natural demand for the currency abroad.
  4. It permanently eliminates the country's need to maintain any foreign-exchange reserves, since domestic-currency reserves are sufficient.
Reveal answer & explanation

Answer: C

  • Internationalising a currency delivers three concrete gains: importers and exporters skip the FX conversion spread; cross-border settlement bypasses slow correspondent-bank chains; and the country's trade becomes less exposed to sanctions that operate through the dollar-clearing system. There is also a persistent seigniorage-like benefit from foreign holdings of the currency.
  • Option A is a common misconception; sovereign ratings depend on debt sustainability, external buffers and institutions, not on whether the currency is 'international'.
  • Option B is fabricated: SDR inclusion has its own IMF review process and is not on an automatic timeline linked to a country's internationalisation efforts.
  • Option D is a silly extreme; even reserve-currency issuers like the US and the Eurozone hold foreign-exchange reserves for intervention and diversification.