Rupee Internationalisation: Progress, Mechanisms, and Trade Settlements with Emerging Markets…

The internationalisation of the Indian Rupee (INR) represents a strategic initiative by the Government of India and the Reserve Bank of India (RBI) to elevate the rupee’s role in global trade and finance. This process involves enabling cross-border trade settlements in INR, reducing reliance on dominant reserve currencies such as the United States Dollar (USD), and fostering deeper economic ties with trading partners, particularly emerging markets. As of January 2026, significant progress has been achieved through regulatory reforms, bilateral agreements, and the establishment of dedicated mechanisms like Special Rupee Vostro Accounts (SRVAs). These developments aim to enhance trade efficiency, mitigate currency risks, and position India as a key player in the evolving global financial architecture.

The push for rupee internationalisation gained momentum in 2022 amid geopolitical uncertainties and sanctions on certain nations, prompting India to explore alternative settlement currencies. By 2025, the RBI introduced a series of measures to accelerate this process, including liberalisation of foreign exchange regulations, expansion of INR lending facilities, and investment options for surplus rupee balances.

Historical Context and Evolution

India’s efforts towards rupee internationalisation date back to earlier discussions on capital account convertibility, but concrete actions intensified post-2022. The RBI’s framework for trade settlement in local currencies was formalised through the issuance of guidelines for Special Rupee Vostro Accounts. Under this mechanism, foreign banks from partner countries open rupee-denominated accounts with Indian authorised dealer banks. Payments for exports to India are credited to these accounts, while imports from India are debited, enabling seamless INR settlements without conversion to third currencies.

By early 2025, over 150 SRVAs had been opened by correspondent banks from approximately 30 countries across 26 Indian banks. In October 2025, the RBI announced further enhancements, permitting Indian banks to extend INR credit to non-residents in select neighbouring countries and allowing surplus balances in SRVAs to be invested in Indian corporate debt securities. Additional reforms included the introduction of transparent reference rates for more currency pairs and easing norms for overseas foreign currency accounts held by Indian exporters.

These initiatives align with India’s broader economic objectives, including achieving a USD 5 trillion economy and expanding merchandise exports. Rupee trade settlements have been particularly prominent in energy imports from Russia, defence procurements, and commodity trades with African and Asian emerging markets.

Key Mechanisms for INR Trade Settlements

The primary vehicle for rupee internationalisation remains the SRVA framework. Eligible foreign banks maintain rupee accounts with Indian banks, facilitating direct settlements. As of late 2025, the RBI had granted permissions to banks from 22 countries to operationalise SRVAs. This list encompasses a mix of emerging and developed markets, with significant participation from emerging economies.

Prominent emerging markets engaged in INR settlements include:

Russia: Extensive use for oil and energy imports, mitigating USD-related sanctions risks.
United Arab Emirates (UAE): Bilateral agreements supporting rupee trade in commodities and services.
Malaysia: Adoption for palm oil and other agricultural imports.
Sri Lanka: Utilised for essential imports amid economic recovery efforts.
Tanzania and Mauritius: Growing usage in trade finance and investments.
Bangladesh: Facilitating cross-border trade in goods and infrastructure projects.
Indonesia and Singapore: Partial integration, particularly in financial hubs.

Other emerging markets such as Kenya, Uganda, Myanmar, and Botswana have also initiated SRVA operations. These arrangements are supported by bilateral memoranda of understanding (MoUs) and free trade agreements (FTAs), with India negotiating expanded rupee settlement clauses in ongoing FTA discussions with countries like Oman, Peru, and New Zealand.

In 2025, trade volumes settled in INR witnessed moderate growth, driven by declining current account deficits and robust foreign exchange reserves exceeding USD 700 billion. The mechanism has proven effective in reducing transaction costs by eliminating intermediary currency conversions.

Advantages of Rupee Internationalisation for Emerging Markets Trade

Rupee internationalisation offers multifaceted benefits, particularly for trade with emerging markets where currency volatility and USD dependency pose challenges.

Key advantages include:

Reduction in Exchange Rate Risk: Traders avoid fluctuations associated with USD-INR or other pairs, stabilising costs for exporters and importers.
Lower Transaction Costs: Elimination of conversion fees and hedging expenses, potentially saving 2-5 percent on trade values.
Decreased Dependence on USD: Mitigates risks from dollar shortages or geopolitical restrictions, enhancing financial sovereignty.
Enhanced Bilateral Trade Volumes: Encourages deeper economic ties with emerging markets, boosting exports of Indian goods such as pharmaceuticals, machinery, and textiles.
Improved Access to Finance: INR lending facilities and investment options in Indian debt markets provide liquidity to partner countries.
Macroeconomic Stability: Supports India’s foreign exchange reserves management and reduces import bill pressures, as seen in moderated current account deficits in 2025.
Geopolitical Resilience: Enables trade continuity amid global uncertainties, as demonstrated in India-Russia energy deals.

For emerging markets, these settlements foster currency diversification, reduce borrowing costs in hard currencies, and promote South-South cooperation.

Disadvantages and Challenges

Despite the progress, rupee internationalisation presents certain disadvantages and inherent challenges that warrant cautious implementation.

Principal disadvantages encompass:

Limited Convertibility: The INR remains partially convertible on the capital account, restricting free flow and global acceptance compared to fully convertible currencies.
Potential for Increased Volatility: Greater international usage could expose the rupee to speculative capital flows, amplifying exchange rate fluctuations.
Monetary Policy Constraints: Expanded global role may limit RBI’s autonomy in domestic interest rate decisions, akin to challenges faced by reserve currency issuers.
Trade Imbalances: Surplus rupee balances in Vostro accounts could pressure INR appreciation if not managed, affecting export competitiveness.
Infrastructure Gaps: Underdeveloped depth in Indian financial markets limits hedging instruments and liquidity for INR transactions.
Adoption Barriers: Partner countries may prefer established currencies due to network effects and trust in USD stability.
Regulatory Complexities: Compliance requirements for SRVAs and cross-border lending add operational hurdles for banks.

These challenges underscore the need for phased liberalisation, maintaining capital controls, and building macroeconomic credibility.

Practical Tips for Businesses Engaging in INR Settlements

Businesses seeking to leverage rupee internationalisation in emerging markets trade should adopt strategic approaches.

Recommended tips include:

Partner with Authorised Dealer Banks: Identify Indian banks with active SRVA networks for seamless account setup and transaction processing.
Negotiate INR Clauses in Contracts: Incorporate rupee settlement terms in trade agreements to hedge against currency risks.
Monitor RBI Guidelines: Stay updated on circulars permitting investments of surplus balances or expanded lending facilities.
Conduct Due Diligence on Partners: Ensure counterparties in emerging markets have access to SRVA-enabled banks.
Utilise Hedging Tools: Where available, employ forward contracts or options in INR pairs offered by Indian exchanges.
Diversify Trade Baskets: Prioritise high-volume sectors like energy, commodities, and services for initial INR settlements.
Seek Expert Advisory: Engage specialised platforms for compliance, risk assessment, and optimisation of rupee trade flows.

Adopting these practices can maximise benefits while minimising operational risks.

Future Outlook and Strategic Implications

As India advances towards rupee internationalisation, sustained reforms in financial market depth, digital payment infrastructure, and bilateral engagements will be pivotal. Integration with systems like Unified Payments Interface (UPI) for cross-border transactions and inclusion of INR in global indices could accelerate adoption. Collaboration with emerging markets through forums like BRICS and G20 will further amplify opportunities.

The trajectory indicates gradual progress, with INR settlements contributing to resilient global trade architecture. However, achieving reserve currency status requires long-term structural reforms, including full capital account convertibility and consistent macroeconomic policies.

In conclusion, rupee internationalisation marks a transformative step in India’s economic ascent, offering substantial opportunities for trade settlements with emerging markets. Businesses positioned to embrace this shift stand to gain competitive advantages in cost efficiency and risk management.

Chat with me directly: DM: 7997801001 | Email: raghu@marpu.org