Explained: How the Indian rupee is going global and drawing interest from more nations – Times of India


India’s rupee trade settlement mechanism, which was set up by the Reserve Bank of India in July 2022, is attracting interest from more countries apart from Russia.
The mechanism is a means of using rupees instead of dollars and other big currencies for international transactions in order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in the rupee.
Dollar-strapped Sri Lanka and sanctions-hit Russia will be the first countries to use the Indian rupee trade settlement mechanism.
What does this really mean though?
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 settled in dollars.
For example, 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 is then converted into euro.
Here, both the parties involved have to incur the conversion expenses and bear the risk of foreign exchange rate fluctuations. With the help of a Vostro account now, instead of paying and receiving US dollars, the invoice will be made in Indian rupees if the counterparty has a Rupee Vostro account.
Even though rupee invoicing for international transactions was allowed earlier, surplus rupee were not allowed to be channeled back into Rupee assets. For a currency to be accepted globally, capital flows and trade have to be liberalized too.
Tajikistan, Cuba, Luxembourg and Sudan keen on rupee trade settlement
Tajikistan, Cuba, Luxembourg and Sudan have begun talking to India about using the mechanism, reported Reuters, quoting two sources and an official document. It has already been used by Russia following the imposition of sanctions on Moscow over the Ukraine war.
The government is reportedly looking to bring countries that are short of dollars into the mechanism.
“The recent gravitation of more countries, including the likes of Tajikistan, Cuba, Luxembourg and Sudan towards the Indian rupee settlement mechanism has been very encouraging. The increasing participation of these countries strengthens the hold of rupee as a currency in the international Forex market,” said – Nikhil Varma, Managing Partner, MVAC.
Over the years, but especially in the last few months, a strengthening Dollar has made imports expensive for most countries around the world, creating an obvious need for an alternative. A reliance on the Indian Rupee, away from the US Dollar could mean crucial respite for these countries, said Verma.
The four countries have shown interest in opening special rupee accounts, called vostro accounts, but partner banks in India have not yet provided those facilities, documents showed. Opening of these accounts needs approval from the Reserve Bank of India.
Mauritius and Sri Lanka have also shown interest, and have seen their special vostro accounts approved by the RBI, documents showed.
How is this trade facilitated?
“The medium of exchange is facilitated by a Vostro Account that is an account maintained by a domestic bank that keeps a foreign entity’s holdings in domestic currency i.e. Indian Rupees. As of now, the RBI has given approval for the opening of 12 Vostro Accounts for carrying out trade in Indian Rupees. The Vostro Account is being utilized regularly for facilitating the settlement of transactions that involve Indian Rupee that is bolstering the position of the Indian Rupee in the international market,” said Suvigya Awasthy, Associate Partner, PSL Advocates & Solicitors.
When an Indian importer wants to make a payment to a foreign trader in rupees, the amount will be credited to this Vostro account, and when an Indian exporter needs to be paid for supplying goods or services, this Vostro account will be deducted, and the amount will be credited to the exporter’s account.
The bank of a partner country; e.g. Cuba’s banks may approach an AD bank in India for opening of Special Rupee Vostro account. The AD bank then will seek approval from the RBI with details of the arrangement and subsequent to the approval granted by the RBI, the Special Rupee Vostro account in the Indian AD bank by a Cuban bank shall be opened. The trade settlement shall then start between the parties in INR. The exchange rate between the currencies of two trading partner countries may be market determined.
Larger trading partners keen on denomination of trade in rupees too
India continues to discuss denomination of trade in rupees with larger trading partners, including key oil suppliers Saudi Arabia and United Arab Emirates.
Details of potential rupee-dirham trade mechanism are being firmed up by the central banks of India and UAE, a second government official said, requesting anonymity. Talks with Saudi Arabia on a rupee-riyal trade mechanism also continue.
The UAE and Saudi Arabia are talking through ways to invest Indian rupees they earn as part of these transactions, as the gulf nation’s exports to India exceed imports from it.
After Russia and Sri Lanka, a deal with Belarus on the cards?
After Russia, banks from Sri Lanka and Mauritius have also opened special rupee trading accounts in local branches in India. Earlier this week, the Economic Times reported that India will explore with Belarus, a close ally of Russia, the option of replicating the deal it has struck with Moscow for settling international trade in rupees.
Belarus is grappling with sanctions from the US and the EU for supporting Russia’s attack on Ukraine. “Since India imports fertiliser from Belarus, a rupee settlement could help. It could be exactly like the rupee trade with the Russian parties. Many Russian banks have opened Vostro accounts with us though some of the Indian oil refiners are paying hard currency to buy oil from Russia,” a banker told ET.
India’s imports from Belarus was $366.1 million in 2021, of which $307 million was fertiliser; exports to the East European country was $71 million with pharmaceuticals and cereals accounting for $21 million and $11.4 million, respectively.
Experts believe rupee becoming an international currency would likely reduce India’s trade deficit and the rupee will be strengthened in the global market
A currency is generally termed ‘international’ if it is widely accepted across the world as a medium of exchange for trade.
According to the RBI, trade settlement in rupees would reduce dependency on hard currencies like the dollar, euro and yen.
“This is a fabulous indication that the Indian economy and the rupee are poised to play a larger role in global trade. The regulations and the regulatory outlook will need to change as demand for the rupee increases. What China tried to do artificially, India may be on the cusp of doing organically,” said Mathew Chacko, Partner, Spice Route Legal.
It is widely believed if the mechanism fructifies then it may go a long way in internationalizing the Indian currency rupee in the long run.SBI Research, in a report in early July, said, an interesting development is taking place in the global currency market as there has been a significant jump in trade in oil and other commodities in currencies such as the Renminbi, Hong Kong Dollar, and Arab Emirates Dirham.
In the report, SBI Research said the Reserve Bank of India (RBI) should make a conscious effort to internationalise the Indian currency rupee amid disruptions in payments caused by the ongoing Russia-Ukraine war.
With inputs from Reuters


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