‘We are all hostage to dollar’: Former RBI governor Duvvuri Subbarao on internationalisation of rupee

Former RBI governor Duvvuri Subbarao believes the internationalisation of the Indian rupee is still a long way off, adding that India will need a more balanced and broader trade footprint failing which it “will be back depending on another currency.”

“Today, we are all hostage to the dollar”.  Speaking at an event in Mumbai, Subbarao said despite recent moves such as India’s deal with Russia for discounted oil, not much headway has been made on challenging dollar’s position as the world’s dominant currency. 

He acknowledged the increasing resentment against the dollar. A lot of it, according to him, was because of America’s tendency to weaponise the dollar. Subbarao said dollar’s dominant position makes the world vulnerable to volatility. “America enjoys an exorbitant privilege because dollar is world’s reserve currency”.    

In a recent interaction over his new book, Subbarao said he had urged the RBI to advance the internationalisation of the rupee. 

He emphasized that the central bank should adopt a less interventionist approach in the foreign exchange market. Subbarao referred to Prime Minister Narendra Modi’s advice at the RBI’s 90th-anniversary event, where Modi encouraged the central bank to make the rupee more globally acceptable.

“For this to happen, many factors need to align. One key step is to remove capital controls and for the RBI to adopt a more hands-off approach,”  Subbarao, who served as RBI Governor from 2008 to 2013, told the Hindu Business Line.

For India, increasing the use of the rupee in international transactions offers significant benefits. It mitigates exchange rate risks for Indian exporters and importers, and decreases the reliance on the dollar. Additionally, it reduces the necessity for maintaining large foreign exchange reserves to manage external vulnerabilities. This, in turn, lowers economy’s susceptibility to sudden capital reversals.