India’s Pursuit of ‘Atmanirbhar’ Rupee

• The new payment mechanism has both economical and geopolitical implications.
• If more of India’s external trade gets invoiced in the rupee, then the internal demand for the dollar might decrease.
• It has liberalized capital account convertibility as it sought to relieve pressure on India’s dollar reserve.
• The move could have a long-term influence on regional nations wanting to trade with India.
• An efficient and transparent framework in payment mechanisms for conducting international trade transactions in the rupee will help in paving way for the rupee’s acceptance as a global currency.

Just Imagine how it would feel if we could trade across the world with the rupee that is widely accepted worldwide, but sometimes the possibility seems far away, doesn’t it? Taking down the dollar which is a de-facto currency for International trade where we conduct 86% of our Imports by using it, even though a mere 5% of our imports originate from the US. Seems impossible right??

The ongoing Russia and Ukraine war opened up new possibilities for making the rupee a global currency. Russia invaded Ukraine in February 2022, which triggered a series of sanctions on Russia by the western nations which included restrictions on Russia’s financial industry, its central bank and its coal and oil exporters, in addition to general export controls that led to locking up of Russian oil to a global market.

But to keep things afloat, Russia started selling its oil at a discounted price to India and China, India’s Import of Russian oil skyrocketed from a very low base at the start of the year by dominating Saudi by October with an import of 891,000 Barrels per day with 20.5 per cent share of India’s Crude import market.

While the US has effectively barred Russia from accessing dollar assets and the European union prohibited global transactions with Russian entities using euro-dominated banknotes for payments and settlements, both India and Russia started to explore the possibilities of the rupee-ruble trade agreement with an alternative payment mechanism to settle dues in rupees instead of dollars or euros, paving the way to re-birth of rupee-ruble relationship which first conceived in 1953 under Indo-Soviet trade Agreement.

If more of India’s external trade gets invoiced in the rupee, then the internal demand for the dollar might decrease which will reduce the price of the US dollar

It was important for India to explore the alternative payment mechanism. In July 2022, the Reserve Bank of India unveiled a mechanism to settle the international transaction in rupee to promote the growth of global trade, with emphasis on exports from India and to support the increasing interest of the global trading community in Indian rupees. The Central Bank decided to put in place an additional arrangement for invoicing, payments and settlement of export/imports in Indian rupees, as well as pushing the rupee as an International currency. 

Under the new mechanism:

• Authorised dealer banks in India have been permitted to open rupee Vostro accounts.
• Indian importers who are undertaking imports via this mechanism will make payment in the rupee which will be credited into a special Vostro account of the corresponding bank of the partner country, against the invoices for the supply of goods or services from an overseas seller.
• Indian exporters using this mechanism will be paid the Export proceeds in rupee from the Balances in the designated special Vostro account of the correspondent bank of the partner country.
• Indian exporters may receive advance payment against the export from overseas importers in Rupees through the new payment mechanism 

This payment mechanism allowed Indian exporters to be paid in Indian Rupees for their exports to Russia instead of standard international currencies like dollars and euros. The Reserve Bank of India has allowed the opening of nine Vostro accounts in two Indian Banks UCO Bank & Induslnd Bank for the settlement of the payments in rupee for trade between India and Russia.

The rupee is currently pegged at almost 82 to 1 USD Compared with the value of less than 75 for 1 USD about a year ago. The unprecedentedly low value of the rupee made Indian imports more expensive. Through India has been able to avoid some of the impact of the declining rupee on energy imports by buying Oil from Russia, the overall impact on the import basket has been unavoidable.

If more of India’s external trade gets invoiced in the rupee, then the internal demand for the dollar might decrease which will reduce the price of the US dollar against the rupee this payment mechanism will certainly be helpful in this regard.

The new payment mechanism has both economical and geopolitical implications. It has liberalized capital account convertibility as it sought to relieve pressure on India’s dollar reserve. Further, this move could assist Indian exporters in collecting advances in rupees from overseas trading partners. Even if the Vostro account is not pre-funded, foreign importers will have to buy in rupees. Besides, the move could have a long-term influence on regional nations wanting to trade with India and hence New Delhi is effectively encouraging them to use the rupee as a foundation currency for trade diversification in their settlement procedures.

With full-fledged rupee trade with Russia, New Delhi trying engaging talks with some other countries like many African nations which have shown interest in trading with India through the rupee. This includes countries like Nigeria and Tanzania. Besides, African nations countries like UAE, Sri Lanka, Saudi Arabia, Bangladesh, and Maldives have responded positively to trade with India in rupee.

New Delhi is effectively encouraging friendly countries to use the rupee as a foundation currency for trade diversification in their settlement Procedures.

Soon after the central bank announces the new payment mechanism Wamkele Mane, Secretary general, The African continental free trade area (a free trade area encompassing most of Africa) in his interview with Business Standard told that using local currency makes trade more efficient, affordable and accessible and can help both India and Africa. He also emphasized investment opportunities in the pharmaceuticals, auto sector and agriculture processing space in Africa which can be tapped.

Whereas in September 2022, India engaged in talks with Saudi Arabia for rupee-riyal trade as the oil-rich nation committed to investing 100 billion dollars in India. During his visit to Saudi, Commerce Minister Piyush Goyal held meetings with key officials to discuss bilateral trade and investment-related issues and both have shown keen interest in rupee-riyal as per the reports

Recently while addressing the press, India’s Ambassador to UAE Sunjay Sudhir told “Central banks of India and UAE were discussing a potential mechanism to trade in rupee and dirham with the view of reducing transaction cost. On February 2022, both India and UAE signed a free trade agreement (FTA) with aim of increasing bilateral trade from the current 60 billion dollars to 100 billion dollars in the next five years.

An efficient and transparent framework in payment mechanisms for conducting international trade transactions in the rupee will help in paving way for the rupee’s acceptance as a global currency. India’s recent new free trade agreements with both the United Arab Emirates and Australia and upcoming agreements with Canada, European Union and the United Kingdom will comprehensively increase its economic engagement with FTA partner markets. With pre-existing international settlement mechanism for the rupee will facilitate this engagement. Once the FTA picks up momentum Indian banks and their counterparts can prepare for the trade settlements in rupee. This will help accept the rupee as a currency of choice for trade among India’s major economic trading partners and it will help in recognizing the rupee as an international currency.

(The author is a student of Business Management at Jain University, Bengaluru. The opinions expressed are the author’s own)

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Sourabh Shetty

Sourabh Shetty is a partner at Fiscal Focus LLP and a finance executive at Param Foundation. He writes on finance, economy and international affairs. Views expressed are the author’s own.