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As Russia-Ukraine war changes rules of trade, should RBI use alternative payment system?

The greenback has remained a natural choice of transaction over the years but with the war in Black sea region leading to flashpoints, countries around the world are exploring alternatives to the US dollar.

Rupee-rouble payment system
The proposed rupee-rouble trade arrangement, which will be a shift away from US dollar dominated trade, may open the door for the Reserve Bank of India to seize the opportunity.

The proposed rupee-rouble trade arrangement, which will be a shift away from US dollar dominated trade, may open the door for the Reserve Bank of India to seize the opportunity and establish dominance in the changing world order as an alternate payment and settlement mechanism system. Following the footsteps of Russia and China, India’s central bank may also look at improving its indigenous payment system and offer an alternative to its trading partners, SBI Research said in a note.

“The geopolitical scuttle can probably be a blessing for the RBI, giving it extra ammunition to seek dominance in the changing world order as alternate payment and settlement mechanisms are explored, and finally put to test by nations, though RBI would have to tread the path cautiously, not risking being labelled an outlier,” SBI Research said in a report Friday.

With conflict in Black sea creating flashpoints,  can the Indian rupee seek dominance?

The greenback has remained a natural choice of transaction over the years but with the war in Black sea region leading to flashpoints, countries around the world are exploring alternatives to the US dollar. Several reports have indicated that central banks may now explore diversifying their foreign exchange reserves. This could open up the way for other currencies such as Chinese yuan or for central bank digital currencies (CBDCs) as a potential model for settlements in cross-border wholesale banking. SBI Research said this makes all the more a case for Indian regulators and policy makers to seek equal, and appropriate footing for Indian rupee in the changing realms or else India will lag behind in a crucial area.

The bouncing back of rouble to pre-war levels, and with Europe’s dependence on Russia for oil and energy needs more apparent, the sanctions imposed on Moscow were somewhat ineffective, the report said. European countries such as Germany and Italy are reliant on Moscow for its energy needs. “That should also anchor India’s quest to build a dedicated payment mechanism for energy related payment and settlements as a long-haul measure,” the report added.

An alternative to SWIFT in making?

“The proposed RBI / VEB arrangement for Rupee-Ruble cross currency pairing (taking cue from the platform established in early 90s) could well be a harbinger of more concerted efforts to settle payments in non-dollar currencies among interested jurisdictions from BRICS or SAARC countries, say for a start, with more countries looking at India’s sovereign Financial Messaging Systems (SFMS), while also remaining connected with a central system like SWIFT,” the report added.

Russia’s state-owned development bank VEB and the RBI are reportedly working on an alternative transaction platform to facilitate bilateral trade after US and EU countries imposed sanctions on Moscow, effectively restricting the country’s access to the globally used Swift banking platform. This was in reaction to Russia’s invasion of Ukraine in February end.

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