In July last year, four months after Russia invaded Ukraine, India proposed to put in place a system to enable the invoicing, payment, and settlement of trade in Rupees with its trade partners. One reason for this was to avail of cheap crude from Russia and evade western sanctions on trade with Moscow. A bigger motivation was the desire to push the Rupee’s acceptance in international trade and make it a global currency, and reduce the dependence on the Dollar.
But greater adoption of the Rupee in bilateral trade is only part of the process. For a currency to be truly international, a swathe of conditions needs to be met, beyond the opportunity that a war presents. The Rupee is only partially convertible as it is not freely allowed to flow across borders, making it difficult to use it for investments abroad. Also, unlike the Chinese Renminbi, the Rupee is not a reserve currency yet.
However, the path towards greater internationalisation may be long but it seems to have got a fillip with India’s push for more bilateral trade to be settled in Rupees. As the Economic Survey for 2022-23 noted, “One of the prerequisites for the emergence of an international currency is that the currency needs to be increasingly used for trade invoicing.” The survey further pointed out that if the turnover of the Rupee in the global forex market rises to 4 percent, the currency can be termed international. Greater use in trade invoicing and settlement is one way to get to this goal.
The mechanism
The Reserve Bank of India (RBI) has allowed domestic and partner countries’ banks to settle bilateral trade in Rupees. Indian banks will open vostro accounts on behalf of foreign banks of partnering countries. Indian importers can make payments into these accounts in Rupees, which in turn can be used to pay Indian exporters. This reduces exposure to Dollars and the exchange rate volatility that comes with it.
Beside Russia, Sri Lanka and Mauritius are the countries that are increasingly using Rupees for settling trades. More than 20 Indian banks have opened vostro accounts to facilitate this. “This mechanism is very efficient for Indian traders as the Dollar exposure is not there. The buyer need not worry about exchange rate fluctuation. This has got a good response,” said an executive at a public sector bank.
According to media reports, Indian government officials are in talks with their counterparts in the UAE, Malaysia, and Nigeria to facilitate Rupee settlement in bilateral trade. If these fructify, the footprint of the Rupee would increase in international trade.
That said, it would still be minimal compared with the Dollar’s heft.
On the fringe
According to data from the Bank for International Settlements, more than 50 percent of global trade is invoiced and settled in Dollars. The share of the US in global trade is a little over 10 percent.
Per the World Trade Organisation (WTO), India’s share in global trade is a mere 1.8 percent, although this is a big improvement from 0.5 percent a decade ago. However, share of global trade need not be a criterion for the usage of a currency in trade settlements. Even so, India needs to boost its heft in global trade to persuade partnering countries to accept its currency.
At present, the Rupee is used to settle with only a handful of India’s trading partners, mainly Russia, Sri Lanka, and Mauritius. But with more partner nations open to settling in rupees, this may change.
So what needs to be done?
Nuts and bolts
The push for greater settlement of trade in Rupees between India and its trade partners is a good move. This needs to extend to other partner nations as well. Banks are also awaiting clearer instructions on processes to make the settlement quick and efficient.
According to bankers, the fear of US sanctions has made some private sector banks wary. Even though banks have agreed to facilitate the payment and settlement in Rupees for Russian imports, they are unsure of the implications if the US decides to retaliate.
Note that the RBI has said that the Rupee settlement system is in addition to the existing trade payment and settlement that is done in Dollars. It is an option that is being increasingly used by Russian suppliers. The same cannot be said about other countries, yet.
Even with Russia, there seems to be a reluctance to settle trade in Rupees of late. Given that Russia exports more to India than it imports, the negative trade balance has meant that Russian banks would be left holding more Rupees than they need. This has caused Russian intermediaries to go slow with Rupee payments.
Which brings us to the fact that the Rupee is not a fully convertible currency. Therefore, India needs to convince partner countries to invest in Rupee assets, which would mean opening the markets more. This is easier said than done. As RBI Deputy Governor Rabi Shankar said in October 2022, “If a substantial portion of its trade is in Rupees, non-residents would hold Rupee balances in India which would be used to acquire Indian assets. Large holdings of such financial assets could heighten the vulnerability to external shocks, managing which would necessitate more effective policy tools.”
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