The government’s announcement of a long-term road map for further internationalisation of the rupee can turn out to be a positive exercise. In the 1950s, the Indian rupee was legal tender for almost all transactions in the United Arab Emirates (UAE), Kuwait, Bahrain, Oman and Qatar, with the Gulf monarchies purchasing rupees with the pound sterling. In 1959, to mitigate challenges associated with gold smuggling, the Reserve Bank of India (Amendment) Act was brought in, enabling the creation of the “Gulf Rupee”, with notes issued by the central bank for circulation only in the West Asian region. Holders of the Indian currency were given six weeks to exchange their Indian currency, with the transition happening smoothly. However, by 1966, India devalued its currency, eventually causing some West Asian countries to replace the Gulf rupee with their own currencies. Flagging confidence in the Indian rupee’s stability combined with an oil-revenue linked boom, slowly led to the introduction of sovereign currencies in the region. The move, in 2023, to withdraw the ₹2,000 note has also impacted confidence in the rupee.
The demonetisation of 2016 also shook confidence in the Indian rupee, especially in Bhutan and Nepal. Both countries continue to fear additional policy changes by the RBI (including further demonetisation). The rupee’s internationalisation cannot make a start without accounting for the concerns expressed by India’s neighbours.
