Prof. M K Bhat
The internationalization of trade in rupee is developing new vistas for Indian economy. It will be a great step in developing the foreign trade of the country. It has become the focus of foreign trade policy 2023 which seeks to increase India’s exports to USD 2 trillion by 2030.That will be nearly three-fold jump from expected exports of $770 billion in financial year 2022/23, despite global uncertainties. The foreign trade policy wants to increase exports on the bases of rupee invoicing and proposes both trading partners to raise their invoicing and settle their transactions on bilateral basis in rupees. The framework will facilitate invoicing of exports and imports in rupee, market determined exchange rates between currency pair of trading partners and trade settlement via special rupee Vostro Account. It will be another attempt to change a calamity in opportunity as the step was taken when the geopolitical situations are not feasible. It is being held that exports can’t sustain on crutches /subsidies for all times to come.
Rupee trade is an additional mechanism besides the existing one, proposed by India to promote bilateral trade and stands open for every country which wants to join. Until now, the approval has been given to Russia, Sri Lanka, and Mauritius. In effect, that means we have a tie-up with an Indian bank and corresponding bank in these countries.
Rupee invoicing became a buzzword post July 2022 RBI circular, that allowed invoicing payment and settlement of trade i.e. export /import in Indian rupee. This order by RBI is aimed at facilitating growth of global trade and supporting the interests of global community in Indian Rupee.
The international economic slowdown accompanied by sanctions on Russia and aggressive raising of rates by Federal Reserve of America developed new challenges for the economies. The sanctions on Russia have given rise to new market structure to de dollarize international market and opened doors for foreign trade in local currency amid economic slowdown. As a fallout of the sanctions and war, making payments to Russia in U.S. dollars became increasingly difficult which in turn triggered a search for solutions in national currencies and de-dollarisation worldwide. Today most foreign trade is in internationally accepted currencies like dollar, euro and pound followed by Yen and Swiss franc. IMF data on global holdings of foreign exchange reserves suggests that 60% is held in dollars, followed by 18 to 20% in euro, 5% in yen and Pound and 3% in Yuan.
In this context India has taken a bold step by entering into agreement with Eighteen countries including Russia, Germany, Israel, UK, Sri Lanka, Singapore etc. to trade in rupee. The traders will import from these countries in rupees through vostro account. In order to have smooth business 18 countries have opened their vostro accounts and more than 60 banks have signed with Indian banks for special vostro accounts. RBI has allowed special Vostro accounts to invest the surplus balance in Indian government securities to popularize the arrangement. Growing economic clout of India will further this arrangement.
The pertinent questions that come to one’s mind are: Will rupee trade prove successful in the market? Is rupee trade going to be a challenge to dollar? Will it help to increase our exports? Will it increase our exchange reserves? will it remove the dollar hegemony in the market? Will it remove our trade deficits? Will it reduce dependence on US dollar? Will the demand for rupee increase? How it will influence our exports? Can small exporters and importers trade in Indian rupee? and much more.
All these questions make it imperative to understand the impact of rupee trade on India. Amongst the benefits the prominent ones are lowering of transaction cost, greater degree of price transparency, quick settlement time, promoting international trade, reduction in hedging expenses, international recognition of rupee, reduction in cost of holding foreign reserves by RBI. It will reduce India’s merchandise trade deficit and will help the country to export more. The exports will further increase as more countries join rupee trade.
It is quite clear that it won’t stop the dollar hegemony but will definitely reduce dependency on US dollar to some extent. Demand of rupee will increase. It will contribute to the economy by saving dollar outflow especially when rupee is falling. Small exporters / importers may feel it easy to export or import in Indian rupees.
It will reduce conversion cost for both the importers and exporters, thereby will influence the price of goods and may escalate their demand in the market. This can be better explained by supposing that an Indian buyer enters into transaction with a seller from Germany. The Indian buyer has to convert his rupees in US $, the seller will receive those dollars and convert it into euros. Both parties have to incur the conversion expanses and bear the risk of foreign exchange rate fluctuation. Herein comes rupee trade, instead of paying or receiving in US dollar the invoice will be made in Indian rupees if the counter party has a rupee vostro account.
It will reduce demand for foreign exchange especially US$ in particular for the settlement of current account related trade flows. It will reduce currency risk for Indian traders. Protection from currency volatility will reduce cost of doing business and will allow better business growth and may provide chances for rupee to grow globally. It will reduce the need for holding foreign exchange reserves and dependence on foreign currency, making economy less vulnerable to external shocks.
Dollar being dominant currency gets its value from domestic imports /exports thereby influences other country’s currency. It influences domestic currency and its instability influences all those currencies which get exchanged through dollar.
Countries with shortage of dollars like Russia, Sri Lanka, Bangladesh, Egypt will be benefitted by rupee trade and have expressed their interest to trade in Indian Rupee. The lack of dollars played a part in forcing Sri Lanka to default on its debt last year, while Bangladesh recently took a loan from the IMF to shore up its own reserves and Russia is facing dollar shortage due to sanctions imposed on it by west.
The payment in rupee has a big lacuna that it can’t be used by the counter party to trade with any other country of the world. It can be acceptable within the agreed countries only through Vostro transactions. Rupee can’t be taken back by the country which earned it. It has to be invested in India, in government security or in Indian companies. It can be a better option for countries which want to invest in India, and it can’t be of much use for those who want to earn in India and invest outside India. This mechanism is being discussed at different levels and various countries have made up their mind to come into this mechanism.
India’s alternative will be of immense help to all those countries who face dollar shortage, want to invest in India, are afraid of currency fluctuations etc. However, the success of rupee trade will ultimately depend on the economic growth of the country. The highest growth rate at present will make many countries to trade and invest in India. We may have to maintain growth rate at higher level if we want to see the success of rupee trade.
(The author is Professor (M.A.I.T) Guru Gobind Singh Indraprastha University, Delhi)
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