The other reason the rupee needs to gain currency is India’s mounting current account deficit (CAD). Unlike other emerging Asian economies, India has not pursued export-led growth. Unless the rupee makes its way into the basket of tradable currencies, India’s rapid growth will work to strengthen hard currencies. This could crimp India’s potential growth rate. The rupee has a long journey ahead before it can aspire to become truly international. But the benefits outweigh the costs, and local currency trade, wherever possible, is the low-hanging fruit. The short-term impact of rupee trade on exchange and interest rates is more than offset by the progressive lowering of the cost of capital.
The tougher leg of the rupee’s globalisation has to do with capital controls. These are more difficult to remove than trade barriers at India’s stage of development. Typically, current account liberalisation precedes freeing the capital account. But India has become more protectionist in trade while nursing export ambitions. If manufacturing exports do not perform to the government’s lofty projections – and recent history provides little room for optimism – there could be grave impediments to relaxing capital outflows.