Trading in local currencies

It will considerably ease the pressure on India’s external accounts

Trading in local currencies
It is a no-brainer that the profile of the rupee is bound to grow in tandem with the country’s rise in global trade. (IE)

At a time geopolitical tensions are rising and threaten to split the world into “two trade blocks, two financial systems, two currency blocks, two payment systems and two separate world-wide webs”—to borrow an expression of former RBI Governor Duvvuri Subbarao—it is but natural that countries like India would push settlement of trade in local currencies. Four months ago, the Reserve Bank of India notified invoicing and settlement of trade transactions in rupees to “support the increasing interest of the global trading community in INR”. For starters, the expectation was that this move would facilitate more trade with Russia that is facing punitive Western sanctions, as also with neighbouring countries like crisis-ridden Sri Lanka. The rupee-rouble trading arrangement, however, is still a work-in-progress with RBI approving the opening of special vostro accounts by more banks for cross-border trade in the Indian currency. Sri Lanka has acceded to India’s request to designate the rupee as an international currency. Of late, corporates in selected jurisdictions have also been utilising non-dollar currencies to procure crude and other commodities like coal to by-pass Western sanctions, striking deals in the renminbi, the Hong Kong dollar and the UAE dirham pairs, according to a SBI research report.

Settlement of a part of India’s growing import bill in rupees would definitely ease the strains on its current account or goods and services trade with the rest of the world. This would, in turn, reduce the demand for dollars to finance such imports and ease the downward pressure on the rupee. For such reasons, it makes sense for India to negotiate with trading partners like UAE, Indonesia and Sri Lanka to settle transactions in local currencies. Sri Lanka thus can export to India and get paid in the Indian rupee, which can then be used for imports from India. This issue featured in the 14th India-UAE Joint Commission Meeting in early September. India has prepared a concept paper regarding rupee-dirham trade, and the central banks of both nations are discussing the creation of a mechanism to facilitate settlement in local currencies. UAE happens to be India’s third-largest trading partner and second-largest export destination. Besides reducing the cost of trading transactions, this move can also make a dramatic difference on remittances from the 3.4 million-strong Indian diaspora in the UAE who transfer $15 billion to their families back home. Although South Asia is the least expensive region to send remittances, this could come down drastically if instant payment platforms in either country are linked, say, through the United Payment Interface of India, to wire payments from the Indian emigrants.

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These are concrete steps forward to push the global acceptance of the rupee to settle India’s trade transactions. It is a no-brainer that the profile of the rupee is bound to grow in tandem with the country’s rise in global trade. Although India’s exports of goods and services are growing rapidly, they currently account for only 2.4% of global exports of goods and services. More critical mass is necessary for internationalisation of the rupee. As indicated in RBI’s payments vision document for 2025, the rupee’s inclusion in the continuous linked settlement initiative, which provides protection for cross-currency settlement in 18 currencies, would help in a big way. This should be taken up in right earnest. A mechanism for rupee settlement through CLS Bank will boost its acceptance in the global trade community.

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First published on: 30-11-2022 at 04:30:00 am