Reserve Bank of India (RBI) & Maldives Monetary Authority (MMA) have signed a Memorandum of Understanding to establish a framework for promoting the use of local currencies for cross-border transactions.

• India has been promoting use of local currencies as part of its efforts to internationalize the rupee and reduce US dollar dependency.

About Internationalization of Currency (Rupee): 

• Currency internationalization is described as the international extension of a national currency’s basic functions of serving as a unit of account, medium of exchange and store of value. 
  • E.g., Involves Promotion of the rupee for current account transactions and foreign trade.

Significance of Internationalization of Rupee 

• Counter trade risk: Internationalization of Rupee enables domestic firms to invoice and settle international trade in local currency, reducing exchange rate risks. 
• Broader financial Access: Domestic entities can tap international markets as IR reduces cost of capital & expands financing options.
• Reserve Management: Reduces need for maintaining large foreign exchange reserves, lowering associated costs and external vulnerabilities. 

Challenges in Internationalization of Rupee 

• Initial stages may see significant currency fluctuations
• Global currency supply obligations would conflict with domestic monetary control needs (Triffin Dilemma)
• Increased exposure to international shocks through unrestricted cross-border capital flows.