Geopolitical and economic uncertainties and India’s own enhanced global economic positioning have set the stage for the global acceptance of the rupee for international trade.

It takes two to tango. In the context of India’s bold step towards opening up settlement of foreign trade in rupee, a twining of geopolitical and economic uncertainties and India’s own enhanced global economic positioning have set the stage for the global acceptance of the rupee for international trade by letting settlements happen in Indian currency, instead of US dollars. The July 2022 scheme of the Reserve Bank of India (RBI) permitting Rupee settlement of external trade will allow investing additional rupees in Indian markets and government securities, facilitate growth of global trade with emphasis on export from India and support the interests of the global trading community in Indian rupees.
The RBI decision also comes at a time when the Russia-Ukraine conflict has increased significant volatility in the forex markets which has impacted the performance of Indian Rupee. The Rupee has depreciated from Rs 74.51/USD on 1 January 2022 and has been hovering around INR 82/USD in recent days. The continuous depreciation of the Rupee is not in favour of exporters, importers and investors, says a PHD Chamber of Commerce & Industry report. According to Deepak Kumar, Executive Director RBI, the value of cross border transactions are 150 trillion in 2022, out of which 80 per cent in dollars and In 2030, 150 could become 300. “We are not saying that dollar prominence should come down, but rupee prominence should go up. We are aiming for rupee acceptance, rupee related and that currency paired rupee market should develop liquidity and depth,” says Kumar who feels India is opportunely placed to fulfil these goals. “The economic condition of the USA is in the opposite direction. There will be a liquidity crisis, so we should use this vacuum to squeeze in and occupy that place,” adds Kumar.
“We are receiving encouraging response from countries to participate in Rupee-based trading,” a RBI note says. Following the introduction of guidelines to promote the settlement of international trade in rupee, the banks of Russia, Sri Lanka and Mauritius have opened Vostro accounts to facilitate the rupee trade. A Rupee Vostro account is a foreign bank’s account with an Indian bank in rupees in India. This is where trade settlement in rupees comes in–instead of paying and receiving US dollars, the invoice will be made in Indian rupees if the counterparty has a Rupee Vostro account. Foreign parties will be able to send and receive money from Indian exporters and importers via these Rupee Vostro accounts.
For a sanctions hit Russia hurting from the Western boycott of the SWIFT system used by banks for payments in foreign currency, the RBI move comes amidst increased trade with India and enhanced supply of discounted crude to India. Russian sources told The Sunday Guardian that they “expect the rupee trade to contribute a lot to the improvement of the trade imbalance with New Delhi and attract more Indian companies to deliver their goods to Russia using the rupee mechanism.” Russian banks such as Sberbank, VTB, Gazprom, BCS, MTS, Tinkoff, Soyuz, Credit Europe Bank (Russia), PSCB, Ros and JSCB have opened Vostro accounts while SBI Mauritius and People’s Bank of Sri Lanka have opened vostro accounts with State Bank of India (SBI). Seylan Bank, NDB Bank and Commercial Bank of Ceylon have opened vostro accounts with Indian Bank. External Affairs Minister S. Jaishankar raised the importance of rupee settlement in helping India and Sri Lanka to steady their trade in a turbulent world, during his visit to Colombo on Saturday. “The use of rupee settlement for trade is obviously in our mutual interest,” Jaishankar said. In December 2022, Minister of Commerce and Industry and Textiles Piyush Goyal and Commerce Minister of Bangladesh Tipu Munshi discussed settlement of trade in Indian rupees.
This new facility is an opportunity for countries having foreign exchange reserve problems to overcome restrictions imposed by the USA and other developed countries to do trade in their currencies, according to Naren Goenka, Chairman of the Apparel Export Promotion Council told the Sunday Guardian. The bigger economic spinoff is that the foreign exchange currency risk will be eliminated. This, says Goenka, can save a substantial amount of hedging cost and import leading to export payments which will be fast and economical, thereby reducing transaction cost.
As the use of Rupee becomes significant, the bargaining power of Indian businesses would improve adding weight to the Indian economy and enhancing India’s global stature. Reducing dependence on foreign currency makes India less vulnerable to external shocks. Use of Rupee in cross-border transactions mitigates currency risk for Indian business. Protection from currency volatility not only reduces cost of doing business, it also enables better growth of business, improving the chances for Indian business to grow globally.
India is looking at reaping the benefits of this major reform initiative which will encourage its traders to do global business in Rupee as invoice currency with about 30 odd major and other trade partners across regions lining up to explore the prospects of using rupee instead of dollars and other big currencies for international transactions. According to Director General & CEO of the Federation of Indian Export Organisations, transactions in rupee are likely to pick up as Tajikistan, Cuba, Luxembourg and Sudan initiate discussions with India about using the mechanism. Key oil suppliers Saudi Arabia and United Arab Emirates are the larger trading partners with whom a potential rupee-dirham trade mechanism is being firmed up by the central banks of India and UAE.
However, on the lines of the cliched ‘Rome was not built in a day’, this progress has been built on a long and chequered past of foreign exchange management through control of foreign exchange by regulating demand due to its limited availability. According to T. Rabi Sankar, Deputy Governor, Reserve Bank of India, various controls were imposed on forex transactions through the Foreign Exchange Regulation Act (FERA) of 1947, which was subsequently replaced by a more comprehensive and rigorous framework through FERA, 1973.
The approach to external sector management underwent a paradigm shift in the 1990s driven by the economic reforms introduced in 1991 when, in line with the advice of a panel on balance of payments, the exchange rate of rupee was made market determined in 1993, as Sankar recalled at an event of the Foreign Exchange Dealers Association of India in October 2022. With the decision to make Rupee fully convertible on the current account and enactment of the Foreign Exchange Management Act (FEMA) in 1999, India’s approach shifted from that of conservation to the management of foreign exchange through facilitation of external payments.
Goenka however believes that the jury is out on how it will spin out. “That is yet to be seen,” he points out. The risk comes from India being a capital-deficient country which requires infusion of foreign capital to fund its growth. If a substantial portion of its trade is in Rupee, as per an RBI analysis, 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. Going forward, this measure also help check the dollar outflow and slow the depreciation of the rupee but to a limited extent, says Hemant Jain, Vice President, PHDCCI.
The RBI has proposed further steps in this direction like enhancing transparency of global Rupee markets through a comprehensive reporting framework. The Asian Clearing Union is also exploring a scheme of using domestic currencies for settlement. An arrangement, bilateral or among trading blocs, which offers importers of each country the choice to pay in domestic currency is likely to be favoured by all countries, and therefore, is worth exploring, suggests an RBI report.