RBI Governor pitches for rupee settlement of cross-border trade in South Asia

Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday said digital currency and rupee settlement of cross-border trade could be areas of greater cooperation among the South Asian countries in the future.

“With the global trade outlook for 2023 overcast, greater intra-regional trade in South Asia can enhance opportunities for growth and employment in the region. At the central bank level, a key dimension of cooperation in the region has been learning from each other on common goals and challenges, such as infrastructure financing, digital financial inclusion, reducing the cost of cross-border remittances (by linking with UPI system) and unconventional monetary policy, to name a few,” Das said.

“Rupee settlement of cross-border trade and Central Bank Digital Currency (CBDC) where the RBI has already started moving forward, can also be areas of greater cooperation in the future,” Das said while addressing a conference co-organised by the International Monetary Fund (IMF) Asia and Pacific Department (APD) and IMF South Asia Regional Training and Technical Assistance Centre.

Referring to the World Bank estimates, Das noted that the intra-regional trade among the South Asian countries is currently only one-fifth of its potential, implying an annual shortfall of $44 billion.

The World Bank assessment also suggests that a common electricity market for Bangladesh, Bhutan, India and Nepal can yield savings of $17 billion in capital costs. Investment in transport and logistics could help reduce the cost for container shipments in South Asia.

According to a 2019 study by the IMF on South Asia, more than 150 million people will enter the South Asian labour force by 2030. The dependency ratio is expected to continue ebbing for almost two decades, indicating the strong demographic dividend the region is set to reap.

In order to facilitate trade with Russia and protect the country’s forex reserves, the RBI in July 2022 came out with a mechanism to allow the settlement of cross-border trade in rupee. As per a notification issued by the RBI on July 11, 2022, international trade can be billed and settled in Indian Rupee.

The immediate reason to allow a rupee-denominated settlement mechanism for international trade was to facilitate and boost trade with Russia, which has been cut off from its dollar reserves in the US, UK and the EU due to the ongoing conflict in Ukraine.

While the RBI’s move has succeeded in facilitating trade with Russia, it has huge potential in boosting trade among the neighbouring countries.

“In the current international setting, global trade and growth outlook appear uninspiring, and policies have to be conducted amid a whirlwind of uncertainty,” Das said.