The government’s push to facilitate international trade in domestic currency is a good idea

Source: The post is based on an article “The government’s push to facilitate international trade in domestic currency is a good idea” published in The Indian Express on 10^th November 2022.

Syllabus: GS 2- International Relations

News:  The government and the Reserve Bank of India (RBI) are promoting international trade in Rupee instead of the US dollar.

What will be the benefits of promoting international trade in domestic currency?

Reduce depletion of forex reserves: Forex reserves of India have been continuously declining. Therefore, international trade in rupees will reduce the depletion.

Reducing dependence on dollars: International trade is generally conducted in the US dollars. However, with this effort, bilateral trading now will be done in rupee by opening a Vostro account in India. This will help in paying in rupees to the Indian exporters instead of dollars.

However, it is not a new concept. India has already done trading in rupee with Iran and it is now looking to expand this with other countries such as Sri Lanka, Maldives, Russia, etc.

However, there are few limitations to such domestic currency-based trade settlements especially with Russia.

What are the limitations of using rupee trade settlements with Russia?

Geopolitical: There are geopolitical concerns related to trade with Russia. Russia has now emerged as India’s biggest crude supplier despite sanctions. This may raise geopolitical issues.

Trade imbalance: India’s import with Russia is greater than its exports. This trade imbalance would leave too much unused rupees in the Vostro account.

What can be the course of action?

Rupee pay settlement in international trade is a great move. However, India should first look at its national interest. It should focus more on exporting with improving bilateral payment settlement mechanism.