An Indian company exports machinery to another country. The machinery is Indian-made; the workers are paid in rupees; most of the factory's other bills are also in rupees. The foreign buyer, however, might still be paying in US dollars.
It is an entirely normal occurrence in the international marketplace, but also one that India is seeking to change. On August 20, 2026, India relaxed trade-policy rules so that exports paid for in rupees would enjoy similar benefits to those denominated in foreign currencies for eligible trade. The change was made with the intent to promote the use of the Indian currency in international transactions.
As far as payments go, this is settlement administration, but one that ultimately rests on who bears the risk of currency fluctuations.
The Dollar Sits Between Two Countries
Let us imagine that an Indian company sells ₹10 crore worth of goods to a buyer in another emerging market. The firms are both unconnected to the US, and the merchandise will never enter American soil. Nevertheless, payment for the goods may well be made in dollars.
The dollar is a convenient currency to use as a medium of exchange since it is liquid and widely accepted both in trade and in finance. Banks deal in dollars, companies quote in dollars, central banks hold reserves in dollars, and commodities are traded in dollars.
The currency facilitates exchange between two economies that have little connection to the US.
The Exporter Has an Exchange-rate Risk
Let us return to our hypothetical Indian exporter, which has agreed to be paid $1 million for its goods, which will be delivered three months later. The company's costs are almost entirely in rupees, which means that if the rupee appreciates strongly against the dollar over the next quarter, the payment in dollars will be insufficient to cover the exporter's expenses.
The firm will be able to hedge against this risk, but hedging is an additional expense. Alternatively, if the contract had been denominated in rupees, the exporter would be insulated from currency fluctuations.
This risk is not gone, however, but passed on to the importer, which will have to pay more rupees for the goods it wishes to buy.
The Reserve Bank of India (RBI) actually highlights less exchange-rate risk for domestic importers and exporters as one of the benefits of enhanced rupee internationalisation. It is not that the risk has been eliminated by using the local currency, but rather that it is now borne elsewhere. It is a matter of whose risk is whose.
India Built the Plumbing Years Ago
India has been constructing the financial infrastructure for greater use of the rupee abroad for several years. In 2022, the RBI began a programme that allows overseas banks that maintain accounts with Indian banks to hold Special Rupee Vostro Accounts. An Indian importer can thus transfer rupees to a special account at an overseas bank, which in turn can utilise the funds to make payments to Indian exporters and other approved transactions.
India has also signed bilateral currency-swap agreements with several countries, including the UAE, Indonesia, Maldives, and Mauritius, facilitating trade settlement in local currencies.
India's financial plumbing infrastructure is in place, and the only remaining obstacle is convincing companies to adopt the rupee.
A Currency Needs Somewhere to Go
If one country buys significantly more goods from another, it will end up with a surplus of the foreign currency. What can it do with the proceeds?
A currency can become international if foreigners are willing to use it to purchase goods, acquire financial assets, make loans, and so on, in addition to being able to easily exchange it for another currency in which they deal.
If the pattern of payments between two countries is relatively balanced, the issue is simpler: the rupees received as payment for goods can be re-spent on other goods. It becomes more challenging for the country with a trade surplus in one direction to acquire the currency needed to buy goods from its partners in the other direction.
The RBI has actually advocated for relatively balanced bilateral payments as a critical enabler for local-currency settlements, because internationalisation on a large scale also requires the emergence of financial markets. The latter cannot happen in isolation without appropriate regulatory support. The domestic capital markets can provide the foundation for deeper and broader internationalisation.
Why August's Change Matters
Policy changes incentives. If it is substantially more lucrative for an exporter to receive dollars, they will do so. The change to trade rules announced in August should reduce the advantage for firms that choose to invoice in foreign currencies. In practice, this should reduce the imbalance for trade settlement in the local currency. The change is not draconian, however; it does not compel buyers to pay in rupees, simply reducing the penalties for those that do.
It is an important change, not least because it recognises what makes currency international: its adoption for use by firms. Policymakers can build financial infrastructure and reduce barriers, but they cannot force international acceptance on their currency. The dollar's dominance is due in part to its convenience, but also because it has been actively adopted by the global marketplace.
Dollar Dependence Creates Vulnerability
The ability to use the dollar as a universal currency is extremely convenient, but comes with costs. The dominance of the dollar means that countries that use it for oil, equipment, debt payments, and financial assets need to constantly acquire more.
India holds vast amounts of foreign currencies as a result, not least as a result of having access to the foreign exchange needed to deal with external shocks.
Greater use of the rupee would reduce the need for India to retain large amounts of foreign currencies, but it would not eliminate the need. The country has a substantial trade deficit, and foreign investors and lenders will always value convenience and reliability over local alternatives. The ultimate aim should be diversification.
Internationalisation Has a Cost Too
The internationalisation of the rupee would not be without its costs to India. The increased appeal of rupee assets to foreigners will see more inflows, making the country more susceptible to fluctuations in global capital markets. More use of the rupee in international markets requires deeper and more liquid financial markets since foreign investors will always prefer a larger market with good liquidity over a smaller, illiquid one. India would gain from reduced exchange-rate risk for some domestic firms but at the cost of capital market liberalisation.
Financial openness carries costs and opportunities for all market participants, with the potential for greater risks for currency speculators.
The Currency on the Invoice Is Economic Power
The focus of international trade is on the goods and services being exchanged: cars, information technology, pharmaceuticals, and oil. But when another country agrees to measure and pay for your trade in your currency, you have gained something far bigger. Your currency has entered their economy and international marketplace.
India will not soon eclipse the dollar as the world's dominant reserve currency, but it does not need to. The more modest goal is far more realistic and desirable. If two countries are doing trade, why should a third be in between, with its currency as the medium of exchange? The machinery leaves an Indian factory, but India wants the invoice to leave in rupees too.