Rupee settlement unlikely to see widespread use, Capital Economics says

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The Reserve Bank of India’s latest mechanism of settling international trade directly in rupees, aimed at boosting interest of the global trading community in the currency, is unlikely to be used widely, Capital Economics said on July 15.

“We doubt the new mechanism will usher in much of an expansion in trade settled in rupees. After all, the reason that most global trade is settled in dollars and euros isn’t because it’s not possible to settle in alternative currencies, but because it’s usually more expensive to,” Assistant Economist Adam Hoyes said in a note.

“Simply putting the financial plumbing in place to allow companies to settle in rupees won’t in itself prompt them to do so unless, for example, foreign firms exporting to India have an appetite to increase their rupee deposits that they can’t satisfy in another way. For most firms, the depth and liquidity of dollar markets make dollars a cheaper and better option.”

Hoyes cited the renminbi as an example. While it has been possible to settle trade with China in renminbi since 2010, today only 17 percent of goods trade actually is dealt in the currency, and the share has come off from a few years ago.

While the rupee settlement mechanism doesn't provide a full workaround for Western sanctions, it may be used in trade with Russia, Capital Economics said.

The new mechanism will also be useful if Indian companies’ access to roubles is disrupted. Unusually, more than half of Russian exports to India have been settled in roubles in recent years.

Also read: What is RBI’s new international-trade settlement mechanism?

While Russian lenders cut off from the SWIFT messaging system could continue trading with India using ad-hoc messaging arrangements and the rupee settlement channel, dealing with a Russian bank or firm that has been sanctioned would put an Indian bank at risk of secondary sanctions whatever payments channel was used, it said.

India’s imports from Russia have spiked since the war in Ukraine amid higher crude oil prices and as India buys more crude from Russia at cheaper rates. An India-Russia trade route is expected to see higher volumes going ahead.