Reuters reported that this is one of the key recommendations of a government panel that was set up in August to study currency swaps and is now understood to have won support from the finance ministry, commerce ministry and the Reserve Bank of India. The move will also make the rupee more acceptable in international trade.
The report of the taskforce under Rajeev Kher, additional secretary in the commerce ministry, which is likely to be finalised over the next few days, is expected to call for currency swap pacts with 10 countries, the agency said.
The assumption is that the rupee is now acceptable de facto as a unit of currency by traders in markets like Singapore and so the barter trade will give it legitimacy.
It is one more step to push the rupee closer to capital account convertibility. For instance India-Singapore trade was over $24 billion in 2012 and diversified. So there is room for savings by India of $1 billion of foreign exchange through this arrangement, an earlier report by The Indian Express had noted.
Earlier this year, India has begun paying for oil imports from Iran in rupees that could help save $8.5 billion in the current fiscal.
It plans to target oil producing countries such as Venezuela and Iraq, too, for a similar arrangement. But while Iran is a special case, Iraq or Saudi Arabia have problems as they hardly import anything from India.
So the rupee chest will be useless for them. Reuters, however, reported that China has also shown keenness to start a yuan-rupee trade while Japan, too, is largely willing to go ahead with such a plan.
Indias current account deficit shot up to $88 billion in 2012-13 and its trade deficit widened to a record $190 billion in last fiscal as the gap with major trade partners such as China soared to $40 billion, and the combined deficit with South Korea, Japan and Venezuela touched $30 billion.
The record CAD is also blamed for the sharp depreciation in the rupee that touched a record low of 68.75 against the US dollar in late August. Since then, the government has stepped in with a number of measures to arrest the rupee fall and control the CAD, which is now estimated at $60 billion in 2013-14.
A larger volume of trade in rupee will expand the onshore market for the currency, which is now dominated by offshore non-deliverable forwards market.
The volume of rupee offshore market is now 18 per cent of the daily turnover for all emerging market economies, as per a Nomura estimate. Available literature also shows that typically for India and China, it is the offshore market that determines how the domestic currency behaves compared with economies that allow more convertibility, like Brazil and South Korea.
For instance, since 2008, while NDF trade in the Brazilian real has retained the top spot among all nations, the rupee has vaulted to the second position by 2013, the same Nomura paper shows.
Singapore and Japan, as well as oil suppliers like Iraq and Venezuela, are being approached to accept rupee payments for part of their exports
The report of a task force under Rajeev Kher, additional secretary in the commerce ministry, is likely to be finalised in a few days
The assumption is that the rupee is now found acceptability as a de facto unit of currency by traders, and the barter would give it legitimacy
This is one more step towards capital account convertibility