Correspondent Banking and Currency Internationalisation: India’s Experience

[By Gurumurthy Cherukuthota]

The author is a student of Symbiosis Law School, Pune.



On July 11, 2022, India’s Central Bank, the Reserve Bank of India (RBI), issued a circular announcing its decision to introduce an international trade settlement mechanism for invoicing, payment, and settlement of exports and imports in Indian Rupees (INR). The RBI’s strategic move illustrates India’s commitment to promoting cross-border transactions and fostering international trade in INR, with the visionary ambition being to establish the INR as a truly global, international currency.

In pursuit of this goal, India has outlined a comprehensive plan involving several measures, including promoting the use of the rupee in international trade, relaxing restrictions, and improving accessibility to Indian markets for foreign investors by liberalising foreign exchange regulations (such as the Foreign Exchange Management (Deposit) Regulations, 2016). Two critical instruments pivotal in achieving these goals are the Special Rupee Vostro Accounts (SRVAs) and Correspondent Banking. By promoting the adoption of SRVAs and Correspondent Banking, India aims not only to boost the visibility and acceptance of the INR as an international currency but also to solidify its position as a burgeoning global economic superpower. Notably, India has already demonstrated its commitment by engaging in bilateral trade with Russia in INR.

While financial liberalisation does not inevitably guarantee currency internationalisation, correspondent banking emerges as a crucial factor in facilitating cross-border transactions. The general decline in correspondent banking, influenced by factors such as anti-money laundering regulations, risk perceptions, and uncertainties, underscores the need for a workable and efficient framework.

Recognizing the limited role of the Indian Rupee in trade invoicing and settlements due to convertibility and risk management issues, India’s strategic move towards trade settlement in INR with Russia, amid global uncertainties, stands out. This not only safeguards bilateral trade but also positions India strategically to leverage the vulnerabilities in global monetary supply chains, opening up avenues for trade with BRICS and other Asian nations.

In essence, the trajectory set by India, as guided by the RBI’s Circular, demonstrates a determined effort to elevate the INR’s status on the international stage. This move aligns with the evolving landscape of the global financial infrastructure, emphasising the role of correspondent banking and innovative approaches in shaping the future of international economic and financial activities. In this context, the article examines the role of correspondent banking in the process of currency internationalisation, conducting a comprehensive analysis of the potential challenges and solutions for establishing the INR as an international currency, drawing insights from India’s experience with Russia.

Correspondent Banking and Internationalising INR

Correspondent Banking is vital to India’s efforts to globalize the INR. It encompasses a financial relationship between two institutions, where one bank (correspondent bank) offers banking services to another (respondent bank). In India’s case, the RBI has been encouraging the use of Correspondent Banking as a means to promote the international use of the INR.

The RBI has introduced the concept of SRVAs, which are rupee-denominated accounts held by foreign banks in India. Regulation 7(1) of the Foreign Exchange Management (Deposit) Regulations, 2016 empowers Authorised Dealer (AD) banks to open Rupee Vostro Accounts. These accounts allow foreign banks to hold INR balances and facilitate cross border and international trade settlement in INR with India, thereby eliminating the need for using other currencies like the USD and the Euros, among others.

India’s Experience with Russia: Challenges to Overcome

In pursuit of internationalising the INR, India has been actively promoting trade settlements with other countries in INR, such as Russia and several other Asian and neighbouring countries. In 2022, India and Russia entered into an agreement to settle bilateral trade in INR to reduce dependency on the USD and avoid currency exchange risk/volatility. In furtherance of the same, several Russian banks have already opened Vostro accounts in India. This move is expected to reduce transaction costs, increase the volume of trade between the two countries and encourage other countries also to adopt this model.

A critical appraisal of India’s experience with Russia would be incomplete without examining the inherent challenges associated with this model. One of the foremost challenges lies in the limited acceptance and liquidity of the INR in the global markets. The INR has not yet attained widespread recognition as an international currency, consequently restricting its liquidity in global markets. Russia’s willingness to transact with India in INR is not rooted in the strength and global standing of the currency but rather emerges from the global economic sanctions imposed on Russia, along with being banned from using the SWIFT gateway, as a result of the Russia-Ukraine war. Therefore, the real test would be to assess Russia’s commitment to this model once the sanctions are lifted.

Another significant challenge surfaces in the form of India’s substantial oil imports from Russia, which have considerably augmented India’s current account trade deficit with Russia. Settling all imports in INR would potentially lead to excessive accumulation of INR for Russia, limiting its utility as a medium of exchange with nations that accept INR for trade. This predicament has already forced India to partially compensate Russia in UAE’s Dirhams, underscoring the necessity for wider acceptability of the currency to ensure the success of this model.

The inadequate development of India’s financial infrastructure emerges as an additional obstacle. To facilitate international trade transactions in INR, substantial investments in technology and human resources are imperative, highlighting the need for a robust and comprehensive financial infrastructure and framework.

Moreover, regulatory and operational challenges must also be addressed to support international trade settlements, necessitating the establishment of Correspondent Banking (CB) relationships through modifications to existing frameworks in India and the participating nations. Key areas demanding adaptation include further amendments to regulations under the Foreign Exchange Management Act, 1999 (FEMA) for accommodating INR settlements, the formulation of specific guidelines for cross-border transactions in INR, and the development of a structured regulatory framework for CB relationships addressing anti-money laundering (AML) and counter-terrorist financing (CTF) compliance. Harmonising regulatory standards among participating countries is also crucial. Additionally, addressing inadequacies in dispute resolution mechanisms and taxation regulations is paramount. While these modifications demand a considerable investment of time and effort, they play a pivotal role in overcoming challenges, ensuring the success of CB relationships and requiring concerted efforts and cooperation among nations. The implementation of these strategic changes is integral to overcoming these impediments and realizing the full potential of India’s collaboration with Russia.

Possible Solutions & Recommendations

Internationalising a currency is a complex process, especially in the presence of dominant currencies such as the USD, EUR, and JPY. The intricacies involved are multifaceted, encompassing macroeconomic stability, market liberalisation, financial sector reforms, and institutional capacity building. In India’s pursuit of internationalising the INR, several key strategies must be employed.

Addressing the issue of inflation is paramount since it has the potential to erode the value of a currency, making it less attractive for international transactions. India must implement robust monetary policies, exercise fiscal control, and alleviate supply-side bottlenecks to ensure macroeconomic stability and combat inflation effectively. Simultaneously, there is a need for continued liberalisation of India’s capital markets to attract foreign investments and foster integration with global markets. This involves the removal of restrictions on Foreign Portfolio Investments (FPIs), relaxation of regulations for foreign investors, and improvements in market infrastructure to encourage increased international participation.

To strengthen the financial sector, India should focus on implementing and promoting reforms that enhance market efficiency, reduce transaction costs, and improve the availability of financial services. This entails streamlining the regulatory framework, promoting digital payments, and encouraging financial literacy among the population. Institutional capacity building is another critical aspect, involving improvements in governance frameworks, the development of human capital, and fostering transparency and accountability. Such enhancements create an environment conducive to internationalisation, mitigating risks and instilling confidence among investors.

The establishment of international financial centers can further India’s ambitions, offering a range of financial services with competitive tax regimes, streamlined regulatory frameworks, and world-class infrastructure to attract investors from across the globe. Additionally, the Unified Payments Interface (UPI) shall be developed strategically to reduce or eliminate dependency on the SWIFT gateway.

Regional cooperation also emerges as a critical avenue, with India engaging neighbouring, Asian, and other friendly nations to augment trade and investment flows, assuming the leadership of the Global South. This can be achieved through trade agreements, investment treaties, and financial integration initiatives, creating a regional economic bloc with friendly geopolitical conditions and propelling the internationalisation of the INR. Ultimately, the strength of the INR is intricately tied to the strength of India’s economy. Therefore, a concerted effort to strengthen the economy and reduce trade deficits is essential to bolster the international standing of the INR.


India’s aim to make the INR an international currency involves several measures, including promoting the use of the rupee in international trade and improving accessibility to Indian markets for foreign investors by liberalising foreign exchange regulations. Correspondent Banking (CB) and Special Rupee Vostro Accounts (SRVAs) play an essential role in achieving these goals by increasing the visibility and acceptance of the INR as an international currency.

India’s experience with Russia provides several challenges that need to be addressed, including limited acceptance and liquidity of the INR in international markets, India’s current account trade deficit, and the need for robust financial infrastructure. Fighting inflation, liberalising the capital markets, financial sector reforms, strengthening and building financial institutions and promoting regional cooperation, are some potential solutions to overcome these challenges.

While India took a brave step at an opportunistic time, establishing INR as an international currency may be a gradual process.


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