TRADE IN RUPEES
CONTEXT :
- RBI has introduced to settle trades with Russia in Indian rupees. India will soon start trading with Russia in rupees as top lender State Bank of India has agreed to facilitate the new mechanism.
- The Reserve Bank of India in July introduced a mechanism to settle international trade in rupees to stave off the impact of the depreciation of global currencies.
MEASURES ANNOUNCED FOR TRADE SETTLEMENT IN RUPEES :
LESS EXPOSURE TO CURRENCY RISK :
- As the Indian traders have to pay in US Dollar to the foreign suppliers, and receive US Dollar from the export receivers (in foreign countries).
- This creates a huge dependence of traders on US Dollar. Thus rupee is exposed to currency risk.
VOSTRO ACCOUNTS :
- The transactions shall be settled through Vostro accounts.
- For this purpose Indian banks may open Special Rupee Vostro Accounts of correspondent banks of the partner trading country.
Currency in Vostro accounts can be used for :
- Payments for projects and investments.
- Export/Import advance flow management.
- Investment in Government Treasury Bills, Government securities.
The exchange rate between currencies of two trading partner countries may be market determined.
FACTORS RESPONSIBLE FOR THIS INITIATIVE :
- To have flow of trades with countries such as Bangladesh, Nepal and Myanmar which have been grappling with a shortage of dollar reserves.
- To have trade with countries which are facing Western sanctions to trade in dollar. For ex- Russian Banks and firms have been barred from accessing global financial settlement mechanisms. Hence an alternate mechanism for trade settlement is required.
- US Federal Reserve has been raising interest to combat domestic inflation in the US. This has led investors to shift their capital to the US, thus depreciating major currencies with respect to the Dollar.
- Thus to protect forex reserves of country such arrangement was need of the hour. As India imports almost 85% of its annual oil needs and other imports, a volatile currency increases the risk of imported inflation in India.
HOW THIS ARRANGEMENT WORKS ?
- With the help of a vostro account, instead of paying and receiving US dollars, the countries can get the invoice of the goods and services made in Indian rupees if the counterparty has a Rupee Vostro account.
- When an Indian buyer wants to make transaction in rupees with a foreign trader, the amount will be credited to this Vostro account.
- When the Indian exporter needs to be paid for goods supplied, this Vostro account will be deducted, and the amount will be credited to the exporter’s account.
- The trade settlement between the two parties can then start in INR. Also, the exchange rate between the currencies of the two trading nations may be market determined.
BENEFITS OF THIS INITIATIVE :
- It will help in offsetting the demand slowdown in western economies with the sanctions hit countries.
- As India runs a trade deficit, it will reduce the outflow of US Dollar and thus help maintaining forex reserves.
- Traders from both the countries involved in transaction will benefit because they won’t have to pay to convert the money or worry about the variation in the exchange rate.
- It will shift global trade from single currency domination to multi currency circulation.
- Bypassing western sanctions by circumventing the SWIFT system and paying for imports in rupees would help India work around the sanctions imposed on Russia and Iran and facilitate access to cheaper oil and imports from such countries.
- There are estimates that India’s shipments to sanctions-hit Russia could grow by an additional $5 billion once the rupee settlement mechanism becomes functional.
- It is a first step towards the path of Rupee’s acceptance as a global currency. Thus internationalising the rupee.
CHALLENGES IN THIS INITIATIVE :
- The Indian banks that have branches in the US are more worried about getting involved in trade transactions with Russia. As they can’t force them to discount the document and give the money in Indian rupees.
- It had limited scope as trade settlements in rupee will be limited to countries like Russia and Iran, which are facing sanctions from the West.
- It is unlikely that exporting countries will consider Indian rupee as a currency of invoicing, unless it suits their interests.
- It may harm India-US relations as Invoicing in Indian Rupee and not depending on US Dollar. It may also have an indirect impact on services sector for which we are dependent on developed markets like the US and Europe.
- As rupee is not a fully convertible currency in Capital Account. Therefore, investment in government securities and bonds cannot be repatriated back to Russia.
- Exchange rate happens to be one of the factors in deciding trade. All elements have to be examined seriously which directly impact the landed cost for importers.
WAY FORWARD :
- To fully reap the benefits of such arrangements there should be critical financial sector reforms which include capital account convertibility, deepening financial markets coupled with large financial institutions other than the RBI to manage the large scale inflow and outflow of capital.
- For a currency to be termed ‘international’ it has to be widely accepted across the world as a medium of exchange for trade. As per the RBI, trade settlement in INR would reduce dependency on hard currencies including the US dollar, euro and yen.
There should be rise of share of Indian goods in global trade, which will create a demand for Indian Rupee as well and make it a more tradable currency.
Syllabus : GS3, ECONOMY
