India, Russia Rupee Trade Talks

What’s in today’s article?

• Why in news?
• International trade settlement in Rupees
• What is international trade settlement in rupees?
• Why does the RBI want to settle payments in Rupees?
• What steps have been taken by RBI to promote international trade settlement in rupees?
• What are the complications?
• News Summary: India, Russia rupee trade talks

 

Why in news?

• Government officials have denied the reports that India and Russia have suspended negotiations on trade settlement in Indian rupee.
• The officials admitted that there are issues on how Russia could use the excess rupee in Vostro accounts, but the talks to iron out these differences continue.
  • A Rupee Vostro account is a foreign bank’s account with an Indian bank in rupees in India.

 

International trade settlement in Rupees

What is international trade settlement in rupees?

• When countries import and export goods and services, they have to make payments in a foreign currency.
• Since the US Dollar is the world’s reserve currency, most of these transactions are entered into US dollars.
  • If an Indian buyer enters into a transaction with a seller from Germany, the Indian buyer has to first convert his rupees into US dollars.
  • The seller will receive those dollars which will then be converted into Euros.
  • Here, both the parties involved have to incur the conversion expenses and bear the risk of foreign exchange rate fluctuations.
• In the process of trade settlement in rupees, instead of paying and receiving US dollars, the invoice will be made in Indian rupees if the counterparty has a Rupee Vostro account.

 

Why does the RBI want to settle payments in Rupees?

• Reduce India’s dependency on US dollars
  • This move will help reduce India’s dependency on US dollars. Hence, in long term, it will shift some demand into Rupees from USD.
• Facilitate trade with sanctions-hit countries
  • The mechanism for international settlement in rupee might have been aimed particularly at facilitating trade with sanctions-hit Russia, possibly Iran, and forex-starved Sri Lanka.
• Stability of Indian rupee
  • India is a net importer and the value of the Indian rupee has been declining consistently.
  • The rupee was the worst performing Asian currency in 2022, witnessing a fall of around 10% against the greenback.
  • Using the rupee for international trade transactions will help check the flow of dollars out of India and slow the depreciation of the currency.
• Global acceptance of Indian Currency
  • International trade settlements in rupee are expected to gradually contribute to the global acceptance of the currency.
  • Later it may be possible to repay loans taken from fund banks like the Asian Infrastructure Investment Bank in Indian currency.

 

What steps have been taken by RBI to promote international trade settlement in rupees?

• In July 2022, the RBI has provided an additional arrangement for invoicing, payment, and settlement of exports/imports in the rupee.
• As part of this mechanism, in December 2022, India saw its first settlement of foreign trade in rupee with Russia.
• So far banks of 19 countries including the UK, New Zealand, Germany, Malaysia, Israel, and the United Arab Emirates have been permitted to make settlements in rupees.

 

What are the complications?

• Limited Acceptance:
  • The Indian rupee is not widely accepted as a settlement currency in international trade.
  • The rupee is not fully convertible. India's share of global exports of goods also is just about 2%.
  • These factors reduce the necessity for other countries to hold rupees.
• Complications in terms of formulating the monetary policy
  • The internationalisation of the rupee can potentially limit the ability of the central bank to control domestic money supply and influence interest rates as per the domestic macroeconomic conditions.
  • If a substantial portion of its trade is in rupee, non-residents would hold rupee balances in India which would be used to acquire Indian assets.
  • Large holdings of such financial assets could heighten vulnerability to external shocks, managing which would necessitate more effective policy tools.
• Challenges in promoting invoices in rupee
  • In the prevailing global atmosphere of trade protectionism and geopolitical rivalries, promoting invoices in rupee with various countries will not be an easy task.
  • Currently, India’s share in global trade is not significant enough and it is highly dependent on the import of fossil fuels, edible oils, gold, silver, etc.
  • This makes it an unlikely possibility for exporting countries to consider the Indian rupee as an invoicing currency, unless it suits their interests.

 

News Summary:

• There were reports that India and Russia have suspended efforts to settle bilateral trade in rupees.
• As per this report:
  • Bilateral trade between India and Russia is highly favourable towards Russia.
    • Since Russia's invasion of Ukraine on Feb. 24 last year, India's imports from Russia have risen to $51.3 billion until April 5, from $10.6 billion in the same period in the previous year.
    • Exports from India in the same period fell slightly to $3.43 billion from $3.61 billion in the previous year.
  • Hence, Moscow believes it will end up with an annual rupee surplus of over $40 billion if such a mechanism is worked.
    • It feels rupee accumulation is not desirable.
• However, government officials have denied this report.

 

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Q1) What is internationalization of rupee??

Internationalization of rupee refers to the process of making the Indian rupee a more widely accepted and usable currency in international transactions. It involves increasing the usage of the rupee in cross-border transactions for trade, investment, and other purposes.

 

Q2) What is convertibility of a Currency?

The convertibility of a currency refers to the ability to freely exchange it for another currency without any restrictions or limitations. In the case of the Indian rupee, convertibility refers to the ability to exchange it for other currencies such as the US dollar, Euro, or Japanese yen, among others.

 

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Source: India, Russia said to suspend talks to settle trade in rupees | Indian Express | The Wire | Business Insider