These transactions take place between resident and non-resident Indians. But before rupee is internationalized, there are some conditions are to be fulfilled. What are they?

Internationalization of rupee requires full convertibility of the currency and a restriction free cross border transfer of funds. India only allows full convertibility on current accounts. Now full convertibility on capital accounts is needed. Read all about convertibility here.

Currently, the US dollar, the Euro, the Japanese yen and the pound sterling are the leading reserve currencies in the world. China is also trying to make its currency renminbi more international but has had limited success so far.

The US dollar enjoys the highest privilege among all currencies in the world. It is used in most global transactions. This is mainly due to the size of the US economy, the reach of its financial networks and the depth and liquidity of its financial markets. The dollar's dominance can also be credited to the lack of good alternatives.

Benefits of Internationalisation of Rupee:

1. It will improve the demand for the rupee in international trade.
2. This can lead to increased convenience and reduced transaction costs for businesses and individuals dealing with India.
3. Reduced Exchange Rate Volatility because when a currency is internationalized, it’s demand in the international markets would increase making it more predictable and reliable for international transactions.
4. Internationalizing the Rupee can enhance India's geopolitical influence, particularly on India's neighbours.
5. It can strengthen economic ties with other countries, facilitate bilateral trade agreements, and promote diplomatic relations.
6. Diversifying settlement currencies can reduce dollar demand and fortify India's economy against global currency shocks.

However there are some challenges such as

1. Rupee’s internationalisation would lead to increased demand for the rupee in global markets which might strengthen the Rupee against other currencies and lower the export competitiveness. A weaker rupee makes exports competitive.
2. Further, to make rupee international, there has to be full convertibility which India does not have, particularly in the capital account.  
3. And the demonetization exercise in 2016, along with the recent withdrawal of the Rs 2,000 note, has affected confidence in the rupee, particularly in neighboring countries like Bhutan and Nepal.

However, recently RBI has hinted to take steps towards higher convertibility and internationalisation of rupee. The Reserve Bank of India (RBI) has allowed banks from 18 countries to settle payments in the rupee. This includes names like Sri Lanka, Israel, Russia, Germany, Singapore and the United Kingdom. Apart from this, 64 other countries have expressed their intent to trade with India in rupee.

Interestingly, the Indian rupee was the legal tender in the Gulf countries, including Kuwait, Bahrain, Qatar and UAE, till the early 1970s. In 1959, the Centre allowed the RBI to issue special notes only for the Gulf region. The currency had the same value as the Indian rupee and was known as the Gulf rupee or external rupee.

Moreover, Indians could also take the Indian rupee notes when they went on the Haj pilgrimage and exchange them freely for Saudi riyals. Later, the Centre introduced special notes for the pilgrimage with the word "HAJ" inscribed on it. These were called "Haj notes''. Read about Haj Currency here

The Indian currency, however, was devalued in 1966. This led to several countries in the Gulf withdrawing the use of the Gulf rupee. Gradually, by the early 1970s, all the countries stopped using the Gulf rupee as their currency.