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There has been growing chatter in policy circles about turning the Indian rupee into an international currency. What does the internationalisation of a currency mean? What challenges does India face in pursuing this objective? And should India take proactive steps to promote rupee internationalisation?

Domestically, a currency such as the rupee serves three functions: a medium of exchange, a unit of account, and a store of value. When the buyer and seller of a product who are both in India transact, the rupee serves as the medium of exchange. Because the price of the product is denominated in the rupee, it also serves as the unit of account. And insofar as the seller may have no immediate use for the rupees but is willing to hold them till such need arises, the rupee also serves as the store of value.

Internationalisation of the rupee means that it serves one or more of these functions when either the buyer or the seller, or both are located outside India. In the extreme case, think of the rupee as the only currency in circulation in the world. It will then be the medium of exchange, a unit of account, and a store of value domestically as well as internationally

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