India, Russia mull direct rupee-ruble FX rate to boost bilateral trade

India and Russia are in talks over establishing a common reference rate

India and Russia are in talks over establishing a direct exchange rate for their local currencies in a bid to boost trade between the two nations, according to a senior government official.

The central banks of the two nations have started talks on working out the modalities of identifying this exchange rate.," the official added

The official explained, "currently there is no exchange mechanism between Ruble and Rupee. Exchange mechanism is only in cross currency reference. That adds a layer of additional layer of premium so the idea is to avoid that."

The idea involves avoiding pegging the exchange rate with the dollar or any other third currency.

"If you want your rupee vostro accounts to be actually functional a direct exchange rate is required. Normally, barring euro and dollar any other exchange mechanism is via a referencing mechanism which is either a dollar or euro. But if you do cross currency exchange then exchange rate tends to be a little higher or inaccurate. If we have a direct exchange rate, we do not have to peg it to any currency, including dollar, this official said.

However, the official says that in order to establish a direct exchange rate, the rupee and ruble would need to trade in the same currency exchange platform for a much larger quantity and for a longer duration while the two sides workout a mutual referencing price.

"There are a lot of international currency exchange platform that do such trading, but right now the referencing is only through third currency. The central banks are discussing on all these aspects," the official added.

This move comes at a time when the Indian government is looking at ways to spur exports to Russia following a pledge between the two nations to increase bilateral trade to over $100 billion by 2030, during Prime Minister Narendra Modi's recent visit to Moscow.

In a joint statement following the 22nd Annual Bilateral Summit last month between Russian President Vladimir Putin and Modi in Moscow, both sides reiterated their commitment to bolstering the special and privileged strategic partnership. They aimed to intensify bilateral interaction by promoting trade and economic cooperation.

Total trade between India and Russia was worth $65.69 billion in FY24, registering a growth of 33.1 percent on-year.

But an increase in the purchase of Russian oil with New Delhi having little to offer in terms of exports, has led to a widening trade gap.

"What is important is to come at a common exchange rate even if it is on a weekly basis to boost rupee trade," the official said.

On concerns around accumulation of rupee by Russian firms in Indian bank accounts owing to the trade imbalance between the two nations, the official said that amount has dropped to a "few million dollars" as the surplus was utilised to make payments for Indian exports.

"India exported $4.5 billion from Russia last year and some of it has been set off against our exports, then some gold imports happened via advanced authorisation mechanism for which the rupee balance was utilised. And, some was set off via repatriation of currencies, so I don’t think much (rupee balance) is lying, only a few millions," the official added.

Back in September 2023, Russia's Foreign Minister Sergei Lavrov reiterated that Moscow has billions of rupees stored in Indian banks that "unfortunately cannot be used right now", but India had proposed some ways in which this money can be invested.

India started exploring a rupee settlement mechanism with Russia soon after the invasion of Ukraine in February 2022, but this practice failed to pick up given the skewed trade balance between the two sides.