India’s digital payment systems have undergone a remarkable transformation in recent years, with the Unified Payments Interface (UPI) taking center stage. UPI’s seamless cross-border transaction capabilities are attracting attention worldwide, making it an essential player in the global financial landscape. Foreign markets, including Singapore, Malaysia, UAE, France, Benelux countries, Nepal, and the UK, have already embraced UPI payments, facilitating cost-effective fund transfers and remittance payments.
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Emphasizing UPI over the Rupee
Traditionally, countries have pursued the internationalization of their local currencies to promote trade and reduce dependence on dominant currencies like the dollar. India, being one of Asia’s largest economies, has also sought to internationalize its currency, the rupee, through bilateral agreements. However, a compelling report by the US media giant Bloomberg urges India to shift its focus towards the internationalization of UPI instead of the rupee.
The Dilemma of Rupee Depreciation and Yuan Dependence
While trading in dollar-backed currencies has helped countries like Russia bypass Western sanctions, their excessive holdings of rupees have led to concerns over currency depreciation. Over the past 15 years, the rupee has lost half of its value against the dollar, depreciating at an annual rate of 3 to 4 percent. This poses challenges for Russia, which invests in 10-year rupee bonds with meager returns of only 7 percent.
India’s refineries have also turned to the Chinese currency Yuan for purchasing Russian fuel, reducing dollar dependence. However, this shift has created a new reliance on the Yuan, raising questions about India’s long-term currency strategy.
UPI: A Practical Gateway to Currency Internationalization
While trade deficits do not significantly hinder currency internationalization, the value of the currency remains a crucial factor for buyers and sellers. India’s UPI presents a more practical attraction for foreign governments and individuals alike. The successful domestic money transfer platform allows for easy payments between buyers and sellers through smartphones.
Indian tourists can already pay vendors in various countries, including Paris, Singapore, and Dubai, using UPI and avoid high credit card fees for international transactions. Integrating UPI with banking systems worldwide could further enhance its potential for international transactions.
Addressing Constraints and Challenges
Despite UPI’s growth and potential, certain limitations need addressing to unlock its full capabilities. For instance, the Indian government imposes taxes on spending over $250,000 abroad, hindering the seamless use of UPI for international transactions. Embracing a more business-friendly approach and reducing protective tariffs would enable Indian tourists to utilize UPI more freely abroad without tax concerns.
The Hype and Reality
While proponents advocate for a “dollar-free transactions” approach, renowned economic historians like Barry Eichengreen caution against exaggerated expectations. The internationalization of the rupee will be neither quick nor easy, and realistic strategies are required to drive UPI’s global reach effectively.
UPI’s Soaring Growth
India’s adoption of UPI has been nothing short of extraordinary. UPI has become a household name in India, accounting for half of the country’s online transactions. In the fiscal year 2022-23, India saw 8,840 crore rupees UPI transactions, indicating a substantial increase compared to previous years. The popularity of UPI continues to rise, with projections indicating that it will account for nearly 73 percent of all non-cash transactions in India by 2022.
Projections and Trends
Various reports and projections highlight UPI’s promising trajectory in India’s financial landscape. By 2022, UPI transactions are expected to contribute nearly 73 percent of all non-cash transactions, with an estimated 1 billion daily transactions by 2026-27.
Embracing a Digital Future
As India’s digital payment revolution continues, the Unified Payments Interface (UPI) emerges as a key player in reshaping the country’s financial landscape. While the internationalization of the rupee through bilateral agreements remains a strategic pursuit, the practical appeal of UPI for seamless cross-border transactions cannot be overlooked. By addressing constraints and embracing UPI’s potential, India can pave the way for a more accessible and interconnected global financial ecosystem.
What is UPI?
The Unified Payments Interface (UPI) stands as a cutting-edge instant payment system created by the National Payments Corporation of India (NPCI). This innovative interface seamlessly enables inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) transactions, revolutionizing the way people conduct financial exchanges. Utilizing mobile devices, UPI empowers users to swiftly transfer funds between two bank accounts, providing a swift and convenient mode of payment in the digital age.
Overall, India’s potential for internationalization lies in leveraging the success and popularity of its digital payment system, the Unified Payments Interface (UPI). As UPI continues to grow and gain acceptance domestically, its integration with global banking systems could make it a practical and viable option for cross-border transactions, thereby reducing the need for overreliance on the internationalization of the rupee through bilateral agreements.
