Rupee Trade Push Faces Dollar Reality

When Malaysian Prime Minister Anwar Ibrahim stood beside Narendra Modi in Kuala Lumpur and pledged to promote bilateral trade in local currencies, it was more than diplomatic courtesy. It was a reaffirmation of India’s quiet but persistent ambition: to see the Indian Rupee (INR) travel beyond its borders as a settlement currency, not merely as a domestic unit of account.

During  Modi’s two-day visit to Malaysia on 7–8 February 2026, both sides agreed to deepen cooperation in trade, digital economy, semiconductors, energy and defence. Yet the most strategically significant line in the joint understanding was the encouragement to industry and banks to invoice and settle trade in Indian Rupees and Malaysian Ringgit, supported by ongoing coordination between the Reserve Bank of India (RBI) and Bank Negara Malaysia.

From Policy Framework to Modest Reality

India’s rupee internationalisation drive formally gathered pace on 11 July 2022, when the RBI permitted invoicing and settlement of international trade in INR. Since then, banks from 22 countries have opened 106 Special Rupee Vostro Accounts (SRVAs) in Indian banks. These accounts allow foreign banks to hold rupee balances and settle bilateral trade without routing payments through the US dollar.

Parliament was informed earlier that countries ranging from Russia and Malaysia to the UK, Germany, Israel, Singapore and Sri Lanka have operationalised such arrangements. On paper, the architecture exists.

In practice, however, the scale remains modest. By late 2025, India had reportedly settled just over $2.5 billion worth of trade in rupees a fraction of its annual trade volume exceeding $1.3 trillion. Estimates suggest that less than 1 per cent closer to 0.2–0.5 per cent of India’s global trade is currently rupee-denominated.

The growth rate is improving from a low base, particularly in corridors involving Russia, the UAE and neighbouring South Asian economies. Yet the gap between ambition and outcome is stark.

The Trade Deficit Constraint

The principal structural obstacle is not political hesitation but arithmetic.

India runs a persistent trade deficit, importing significantly more than it exports. When a country sells oil, machinery or electronic components to India and accepts rupees, it accumulates INR balances. The question then becomes unavoidable: what can it do with them?

Unless the exporting country buys an equivalent volume of Indian goods or invests in Indian assets, it risks holding a currency that is not fully convertible on the capital account. Few exporting nations are willing to accumulate large stocks of rupees without clear reinvestment avenues.

This imbalance is particularly visible in energy trade. When India pays for crude in rupees, the surplus rupees must either be recycled into Indian exports, invested in Indian government securities, or remain parked in vostro accounts an unattractive proposition if liquidity and exit options are limited.

Dollar Dominance Still Intact

The second constraint is structural global inertia.

The US dollar continues to account for roughly 47–58 per cent of global trade settlements, depending on the metric used. Commodities such as oil, gold and most industrial inputs are dollar-priced by default. Financial markets, derivatives, insurance contracts and shipping documentation are built around the dollar ecosystem.

Even China’s much more aggressive strategy has yielded gradual results. The Chinese Yuan now accounts for around 4.5–7 per cent of global payments, supported by the Cross-Border Interbank Payment System (CIPS) and deep trade surpluses. Beijing’s success rests on scale, surplus liquidity and a tightly coordinated state-backed push.

By comparison, the Rupee’s share in global payment systems remains below 0.3 per cent. India’s approach has been incremental and trust-based, but without a structural surplus, currency internationalisation faces a ceiling.

A Strategic Hedge, Not a Revolt

That said, rupee settlement is not an attempt to dethrone the dollar overnight. It is, more realistically, a strategic hedge.

When Western sanctions disrupted payment channels in 2022, the rupee mechanism ensured continuity in certain trade flows. It provided resilience without overt confrontation. In an increasingly fragmented global order, such optionality carries value.

However, to move from symbolic agreements to meaningful scale, policy recalibration is essential.

What RBI and Government Must Do

If India wishes to see the rupee approach even a fraction of the Yuan’s global footprint, several steps are unavoidable:

1. Reduce the Trade Deficit Structurally
   Currency internationalisation follows export strength. India must aggressively boost high-value manufacturing and services exports to create natural demand for INR.

2. Deepen Rupee Asset Markets
   Foreign partners must have attractive avenues to deploy surplus rupees including easier access to Indian government bonds, corporate debt and infrastructure investment vehicles.

3. Gradual Capital Account Liberalisation
   While prudence is essential, calibrated easing of capital controls would enhance confidence in holding INR balances.

4. Commodity Pricing in INR
   India could begin invoicing select energy imports or long-term commodity contracts in rupees, especially with strategic partners willing to experiment.

5. Digital Rupee for Cross-Border Use
   A robust CBDC framework for trade settlement could bypass legacy correspondent banking constraints.

6. Export Credit Support in INR
   Encourage Indian exporters particularly MSMEs  to invoice in rupees by offering hedging support and preferential credit terms.

Currency internationalisation is not decreed; it is earned through scale, stability and surplus credibility. Malaysia’s endorsement is diplomatically significant, but the real test lies in whether the rupee can evolve from a bilateral convenience into a credible regional settlement currency.

Until then, the dollar will continue to run the show and the rupee will remain a promising but cautious contender.