Rupee goes global

India has of late stepped up its bid to internationalise rupee as the US sanctions on Russia triggered renewed calls for de-dollarisation of global trade

One of the key highlights of India’s foreign trade policy, which came into effect on April 1, is its focus on facilitating use of rupee for settlements in international trade. It clears the way for all export contracts and invoices to be denominated in Indian Rupee (INR).

Commerce Secretary Sunil Barthwal says that settlement of foreign trade payments in rupee would be particularly helpful in boosting shipments to several countries facing shortage of dollars, like Sri Lanka and Bangladesh.

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The trigger for pushing rupee as a currency for settlement of foreign trade came from the Russia-Ukraine war. Nearly five months after Russia’s invasion of Ukraine, the Reserve Bank of India (RBI) came out with a mechanism to facilitate international settlement of trade in rupee. The first settlement under this mechanism was done with Russia in December 2022. India and Malaysia earlier this month agreed to allow trade settlement in rupee.

The international trade payment settlement in rupee is done through Special Rupee Vostro Accounts. The RBI has so far allowed this special account arrangement with 18 countries – Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, and the United Kingdom.

The increasing participation of the countries will strengthen the hold of the rupee as a currency in the international foreign exchange market. Clearly, the arrangement, which started with sanctions-hit Russia and dollar-strapped Sri Lanka, is gaining momentum globally. This paves the way for internationalisation of rupee. It will impact the Indian economy and the business in multiple ways.

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“If we can get delinked ourselves from dollar trading, that will help us a lot,” says Ajay Singh, chairman and managing director of SpiceJet. He says that substantial payments made by the companies operating in the aviation sector are done in dollars while their earnings are in rupees. This is also true for the companies operating in several other sectors as well.

Singh, who is also the president of industry body Assocham, says that the international payments in rupee would act as a natural hedge for the Indian companies.

India faces a huge trade imbalance, primarily due to dependence on imports to meet its energy requirements. Merchandise trade deficit for April-February 2022-23 rose to $247.52 billion as against $172.53 billion recorded in the corresponding period of the previous year.

The payments for international trade are done in any convertible currency. It includes euro, Japanese yen, Chinese yuan, UK’s pound sterling, Saudi riyal and UAE’s dirham. However, in most of the cases, the amount is denominated in the US dollar. For example, if an Indian firm wants to buy some goods from a seller from the UAE it will have to first convert its rupees into dollars. The UAE seller will have to convert dollars into dirhams. The company will have to pay the conversion fees and also hedge against the currency fluctuations.

The internationalisation of the rupee will cut dollar demands and help narrow trade and current account deficits. “Trade in Rupee would reduce transaction cost in terms of fees and time as businesses will not have to deal with complex regulations for cross-border transactions for imports and exports,” says Sanjay Notani of Economic Laws Practice.

The internationalisation of rupee is important from the perspective of the country’s growing influence in the global economy. India is the fastest growing among the major global economies. The country’s foreign exchange (forex) reserves is the fourth largest globally. It stood at $578.77 billion for the week that ended March 24, according to the RBI data.

Strengthening dollar has made imports expensive for India as well as most other countries around the world. This creates an obvious need for an alternative. Now the moot question is if the rupee can serve as the alternative and take a lead role in de-dollarisation of international trade.