Rupee Trade
The Reserve Bank of India on 11th
July 2022 issued a circular to all Category 1 Authorized Dealers Banks for
International Trade Settlement in Indian Rupees to promote widening of global
trade with more significance to the exports. This new mechanism has been
initiated with immediate effect but shall require the ADs to take approval from
the FX Department of RBI.
Dollar the holler
Yes, the dollar has become a major
responsible currency to all the economy to holler for help (eg. Sri Lanka). The
rise in Fed interest rates (from 1% to 1.75%), ongoing war, soaring inflation
and huge FII sell offs in the markets witnessed how the Indian rupee performed
against the US$ in one year. The INR performed at -7.2% against US$ hovering to
Rs. 80 per dollar. An increase in dollar rates led to an increase in interest
rates charged by banks on trade transactions due to high cost of borrowings and
eventually putting a hold on their operations.
With the rising dollar rates of both,
over the counter and derivatives currency markets, most of the importers are rushing
to hedge and to cover their currency risk after rupee depreciation as they
panic margin pressure on their liabilities. The 12 months forward premium stood
11 BPS higher. Many international banks in India have predicted US$ to reach
Rs. 83 till the third quarter of the year.
Not only the Indian rupee has been
depreciated. The below table shows one year performance of other major currencies
against the US$:
|
Currencies |
One year performance |
|
Sri Lankan Rupee |
-83.20% |
|
EURO |
-18.2% |
|
Great Britain Pound |
-17.2% |
|
Korean Won |
-14.8% |
|
Indian Rupee |
-7.2% |
Reserves and Surplus Deficit*
India has more imports than exports which makes it a trade deficit country. Its June 2022 trade deficit stood at US$ 26.18 billion with increased exports (US$ 40.13 billion) than imports (US$ 66.31 billion). Since the world trade is currently settled in US dollars, India must maintain huge forex reserves to make payments against its imports. The pressure from the world markets and the depreciating value of the rupee makes reserves slip down.
The above figure shows the decline in
forex reserves plunging to 15 months low to US$ 580 billion as of July 2022. At
the current level, the reserves may only cover 10 months of the imports.
New Mechanism, New Opportunities
The new mechanism introduced by the
RBI aims at promoting exports and imports with countries by using Indian rupee
as a main currency. The main objective is to promote more exports to bring
trade surplus and increase its forex reserves. This measure will also open
doors to trade with countries such as Russia, Iran, African and South American
nations which are under sanctions and are willing to have trade relationship
with India. The Ukraine-Russia war created more catastrophe around the world as
Russia being the largest importer and exporter and because of the sanctions, it
left other countries to demand more of Russian commodities and exports to Russia
were terminated. Since the sanctions were imposed, Russia has been in talks
with India, Azerbaijan, Iran, and other countries to eliminate USD and EUROS
from trade transactions.
In this new mechanism, an AD bank will
open a Special Rupee Vostro account of correspondent bank of the trading
country to settle all trade transactions in rupee. This will enable the
importer to make payment in rupee against the invoices and the exporter to
receive payment in rupee. As the invoicing will be denominated in Rupee, the
exchange rate between the currencies of two countries shall be market
determined. The issue of letter of
credit (LC), Bank Guarantees and other shipping documents can be decided
mutually between the banks and the parties but under the framework of UCPDC and
Incoterms. Even though the SWIFT system has banned Russia from exchanging
messages from other countries, this new system will enable secure, safe and
efficient exchange of messages through mutual agreement.
The new system also aims to start the
International North-South Transport Corridor (INSTC) in full fledge. The
International North-South Transport Corridor (INSTC) is a multi-mode network
which is 7,200 km long and involves moving of freight by Road, Rail, and
Shipping route between Russia, Iran, Afghanistan, Azerbaijan, and India. The
objective of this project is to reduce transmission costs and time over the
existing route being used. A study by the analysts also found that this route
is 40% shorter and 30% cheaper instead of the traditional route and have also predicted
that there shall be more connectivity between major cities involved in this
agreement.
The corridor was again promoted by
Russia and Iran last year as an alternate to Suez Canal route which was blocked
by a cargo vessel. The below image shows the INSTC route via Russia, Iran, India,
and other central European nations.
Benefits to India
The Rupee trade shall help India
reduce or eliminate trade deficit by importing commodity from sanctioned
countries at a lower cost and settlement in rupee. This shall keep the spending
in dollars limited. A recent visit of Iran’s foreign minister to India to
promote trade can also see more growth in rupee trade as both the countries are
already settling trade transactions in rupee since 2011 despite Iran being in
sanction list.
Prior to covid pandemic and the
collapse of the Sri Lankan economy, Sri Lanka was one of the major exporters of
tea to the world. The drastic fall of its economy has now allowed India to step
forward and to meet the demand of its tea exports worldwide. Iran, UAE, Russia,
USA and UK are the major buyers of tea from India. (Refer below table). High demand
for tea witnessed 9% growth during Jan-April 2022. As other countries have
stopped exporting, Russia is now more dependent on agricultural products from
India.
(Commodity:
HS Code 0902 TEA)
|
Country |
Value in US$ million (2021-2022) |
|
Iran |
105.91 |
|
UAE |
81.20 |
|
Russia |
76.01 |
|
USA |
62.59 |
|
UK |
42.15 |
|
Others |
316.61 |
|
Total Tea Exports |
684.47 |
India having trade surplus and deficit
with other countries can also benefit from the Rupee Vostro Accounts. The
Surplus balance in these accounts can be used for investments in Treasury Bill
and Government securities, advances, and payments to development projects.
But the question arises: will the
countries having trade surplus with India start rupee trade? Or what will they
do when the surplus funds sit idle in their vostro account?
The lost legacy
During the British raj, the British
tried to establish a powerful economy in India by appreciating pound and
depreciating rupee, but the Indian rupee was an official currency of Gulf &
African countries such as Qatar, Kuwait, Oman, UAE, Bahrain, Uganda, Kenya,
Mauritius, and Seychelles. After the partition in the year 1947, Pakistan had
their own currency Pakistani Rupee. Even after independence, Gulf notes were printed
by the RBI for circulation outside India for trade purpose but after multiple
rupee devaluation due to economic concerns of the World War II and Trade
deficits amid high inflation many countries became independent and adopted
their own currencies.
In the 1900s, as the British tried to
devalue the Indian rupee, Dr. Babasaheb Ambedkar (known as the architect of the
Indian constitution) wanted to strengthen the Indian rupee and proposed all the
forces to work on stabilizing the purchasing power of the currency. He
countered Professor John Meyer Keynes in his book “The problem of the rupee:
its origin and its solution”. By Saying “Our differences extend to
almost every proposition he has advanced in favor of the exchange standard.
This difference proceeds from the fundamental fact, which seems to be quite
overlooked by Professor Keynes, that nothing will stabilize the rupee unless we
stabilize its general purchasing power. That the exchange standard does not do.
Those standard concerns itself only with symptoms and does not go to the
disease.”
Conclusion
We understand that in the 1900s, India
was the largest economy and use of similar currency trades between small countries
were quite an ease. As the new mechanism introduced by the RBI, India shall
regain its currency power and will encourage the trade integration with nations
under sanctions, economic crisis and trade surplus & deficit.
Reference:
https://www.al-monitor.com/originals/2022/06/iran-russia-establish-trade-centers
https://www.al-monitor.com/originals/2021/04/russia-iran-again-promote-alternative-suez-canal
https://en.wikipedia.org/wiki/International_North%E2%80%93South_Transport_Corridor#Current_status
https://www.cnbctv18.com/finance/international-trade-settlement-in-indian-rupee-14158012.htm
https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12358&Mode=0
https://www.freepressjournal.in/analysis/the-rupees-quest-for-international-acceptance
https://www.ccs.in/internship_papers/2002/28.pdf