India and Russia are likely to introduce a "dynamic reference rate" for their currencies, the Indian Rupee (INR) and the Russian Rouble (RUB), according to a report by The Economic Times. This proposed initiative aims to simplify and enhance financial transactions between the two nations, while also mitigating the impact of US sanctions on Russia.
Reserve Bank of India Governor Shaktikanta Das, earlier this year, firmly stated that there are no plans to pursue de-dollarisation. Speaking at the World Economic Forum Annual Meeting 2024 in Davos on January 16, Das clarified that efforts to internationalise the Indian Rupee are not intended to replace the US dollar. “The dollar will remain the dominant currency,” Das said. He highlighted the risks of over-reliance on a single currency, noting that global trade could be vulnerable to that currency’s volatility.
Why Is This Needed?
Currently, the process of converting INR to RUB is complex and cumbersome. It involves a two-step procedure: first, converting INR to USD, and then USD to RUB. This process is further complicated by US sanctions, which restrict Russia’s access to international financial systems such as SWIFT. Additionally, India’s trade imbalance with Russia, where India imports more than it exports, has led Russian banks to accumulate a large amount of rupees in Vostro accounts held with Indian banks.
What’s The Solution?
To address these challenges, India and Russia are considering establishing a reference exchange rate between INR and RUB, the ET report added. This rate would be flexible, meaning it could be updated by the Reserve Bank of India and the Bank of Russia to reflect current market conditions. They are also working on a system to confirm payments more efficiently.
This new system could be modelled after the existing framework between India and the UAE, where transactions are settled in local currencies (INR or dirham) with central bank support. The initiative might also allow Russian funds in Indian vostro accounts to be invested in Indian stocks and securities, helping manage rupee balances and opening new investment opportunities.
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Current Challenges
Despite these advancements, US sanctions have limited the access of major Russian banks to international financial services, necessitating the use of smaller banks for some transactions. For larger transactions, such as oil purchases, major Russian banks remain crucial, highlighting the need for better systems to handle INR-RUB transactions and investments.
India’s Efforts In De-Dollarisation
In July this year, Prime Minister Narendra Modi visited Moscow for the first time since 2019, and met Russian President Vladimir Putin. Their discussions focused on reducing the dominance of the US dollar in global trade and aligning with a broader BRICS initiative centred on de-dollarisation. Russia has recently completed de-dollarising trade with Iran, and the BRICS group aims to further reduce reliance on the US dollar by developing native payment systems.
India has also shown efforts towards de-dollarisation. Alongside four ASEAN countries, India launched a digital platform to facilitate cross-border retail payments without relying on the US dollar. Additionally, India and the UAE have formalised an agreement to settle transactions in their local currencies, and about 60 percent of trade between Russia and India is now conducted in roubles or rupees.
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Challenges & Strategic Moves
However, India’s position on de-dollarisation has not been without challenges. At the SCO 2024 summit, India’s Foreign Minister Subrahmanyam Jaishankar attended in place of Prime Minister Modi, reflecting India’s cautious approach. China, aggressively promoting de-dollarisation, has found a partner in Russia, advocating for payments in local currencies, including the Chinese yuan or Russian rouble. Despite saving $7 billion in exchange rates by using yuan and roubles for Russian oil in 2022, India’s reluctance to fully adopt the yuan has led to a shift towards purchasing oil from the US.
What’s The Bigger Picture?
The BRICS bloc is also working towards establishing a new reserve currency supported by a basket of their respective currencies. Although the BRICS nations have yet to create their own currency, they are developing a blockchain-based payment system known as the BRICS Bridge. This system aims to connect member countries' financial systems and facilitate settlements in central bank digital currencies. Such developments could challenge the dominance of the US dollar, which currently underpins approximately 90 percent of global currency trading.
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Why It Matters?
The push for de-dollarisation reflects a broader trend to reduce the US dollar's influence on global trade and finance. This shift could weaken the effectiveness of US sanctions and alter global economic power dynamics. According to a JP Morgan report from August 2023, de-dollarisation involves a substantial reduction in the use of dollars for global trade and financial transactions. While the dollar remains dominant in transactional contexts, its share in global FX reserves has dropped to a record low of 58 percent, signalling an ongoing shift in the global economic landscape.
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