By: Ammar Nainar
India’s announcement of a Line of Credit of almost $60 million to Mauritius for replacing old water pipes might not seem like a big deal. But it was a small if important step: for the first time, India extended a concessional loan in Indian rupees — ₹487.60 crores to be precise — as part of early efforts to internationalize its currency. (A crore is a number denoting 10 million.)
India uses Lines of Credit (LoCs) as a tool of foreign assistance to promote trade, facilitating borrower countries or institutions in importing Indian goods, services, and projects on deferred credit or concessional terms. The Indian government extends LoCs either on behalf of the Export-Import Bank of India (EXIM Bank) or the State Bank of India after an inter-agency process involving the foreign and finance ministries. Since 2000, the Indian government has extended 312 LoCs totaling $32.6 billion to more than 65 countries and completing more than 320 projects. Most are focused in South and Southeast Asia or in Africa. Projects might involve setting up infrastructure or importing Indian equipment relating to agriculture, industry, infrastructure, social welfare, energy, and defense and security.
LoCs can support currency internationalization in two ways: As a “means of payment” to settle foreign trade transactions and as a “unit of account” to invoice trade and denominate financial instruments. Therefore, rupee-denominated LoCs can enable a country like Mauritius to import Indian goods and services for this project and settle the transaction in Indian rupees. This may also be beneficial for Indian firms, as they can reduce their exposure to exchange rate risks. Moreover, as India runs a trade surplus with Mauritius, settling trade in Indian rupees (INR) can help balance trade and lower transaction costs for both countries too. In the long run, this can deepen India’s economic connectivity with important neighbors and partners.
By using LoCs to incentivize and settle trade in INR, India’s central bank — the Reserve Bank of India (RBI) — is also learning from China’s experience in internationalizing the renminbi (RMB). An RBI report in July 2023 stated that “China has followed a similar approach by using a large number of bilateral swaps and Lines of Credit (LoC) to encourage the use of the Renminbi for international trade transactions.” Under the Belt and Road Initiative, Chinese state banks such as the China Development Bank (CDB) and its EXIM bank have funded projects in RMB with an objective to “increase the speed of its internationalization”. In 2021, China eased restrictions on its banks to provide more overseas loans denominated in RMB, including as export credits.
India is simultaneously making other efforts to internationalize the rupee. This includes concluding bilateral currency swap agreements with at least 23 countries and institutions, including Japan and the South Asian Association for Regional Cooperation; introducing its Unified Payment Interface (UPI) systems in Bhutan, France, Mauritius, Nepal, Oman, Singapore, Sri Lanka, and other Southeast Asian countries; creating a framework for local currency trade with Sri Lanka and the United Arab Emirates; and building a financial services center in Gujarat. Already, two of India’s neighboring countries, Bhutan and Nepal, accept the Indian rupee as legal tender.
Therefore, India’s extension of rupee-denominated concessionary loans is one among several efforts underway to support the INR’s internationalization. There is still a long way to go, and it will require third countries to begin making transactions in INR. For this, further reforms would be required in capital account convertibility, trade policy, and capital markets in the long run. However, recent steps, such as this small loan to Mauritius, signal India’s long-term currency objectives.
Ammar Nainar is a Junior Fellow and Program Assistant at ORF America.