International Trade: Rupee settlement may bring annual savings of $36 billion in hard currency

The launch of international trade in Indian rupees could lead to annual savings of $30-36 billion in hard currency and widen the scope for such trades with countries in the region, easing pressure on the exchange rate, experts told ET.


International Trade: The mechanism, which can be kicked off without delay with Russia, may be favorable for Indian government bonds as well. The surplus balance held in a special Vostro account to be opened under the rupee payment mechanism can be used for investing in the local capital market by entities based in India’s trading partners under the bespoke model.

“When a country faces a record high current account deficit, such rupee-denominated trades with select countries save dollar outflows on account of imports,” said

chief economist Madan Sabnavis.

‘Need to Expand Currency Basket’

“The move should also bring in rupee investments in local asset classes, including bonds and equities,” Sabnavis added. A Vostro account is one held by a bank on behalf of another.

India’s imports to Russia amounted to about $2.5 billion each in April and May – $30 billion on an annual basis. Some analysts expect this to swell to a monthly average of $3 billion over the fiscal year, or $36 billion in all.

“This can potentially reduce India’s hard currency outflows to the extent of $3 billion per month now while providing Russia with INR currency reserves to be deployed in India and provide welcome demand for India bonds,” said B Prasanna,

Head of global markets.

Apart from that, the window opens up the possibility for countries such as Russia, Iran, or even Sri Lanka to engage with New Delhi while they either face global economic sanctions or need financial aid. “Internationalising the rupee requires expansion of the basket of key currencies to seven or eight including our local unit from five currently,” Sabnavis said.

The currencies that form the majority of the world’s forex reserves include the dollar, euro, renminbi, and pound. The dollar remains the world’s top reserve currency but its dominance has eroded to some extent. The greenback accounted for just under 60% of allocated reserves at the end of the first quarter of the 2022 calendar year, down from 65% in the same period in 2016, the FT reported, citing IMF data over a week ago.

India’s trade deficit, or excess of imports over exports, swelled to a record $25.63 billion in June, driven by imports of petroleum, coal, and gold. Exports were muted, causing the gap to widen.

“If the bulk of India-Russia trade comes under this INR settlement route, the net trade (Russia’s surplus and India’s deficit) will remain as INR balances of Russian banks with India’s banking system, to be invested in Indian assets such as government securities,” said Ananth Narayan, associate professor at the SP Jain Institute of Management and Research.

Net trade was at $4.78 billion in the first two months of FY23 as India’s imports from Russia in April and May added up to $5.04 billion, according to Bank of Baroda Economic Research data. This is a significant jump, compared with $10 billion for the whole of FY22.

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