Using a rupee route to get around a dominating dollar

Source: The post is based on the article “Using a rupee route to get around a dominating dollar” published in The Hindu on 2^nd August 2022.

Syllabus: GS 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Relevance: To understand the concept of promoting the Rupee in International Transactions.

News: A number of countries, including India, are now considering the use of other currencies to avoid the U.S. dollar and its hegemonic role in settling international transactions. This is due to recent geopolitical developments in the Russia-Ukraine war followed by the sanctions imposed on Russia by the West.

What are the impacts of sanctions on Russia?

The impact of sanctions on Russia includes a) L-shaped stagnation in GDP which has declined by 10% to 15%, b) de-industrialisation and unemployment leading to sharp declines in the production of steel, wood and automobiles.

About India’s past Rupee-Rubel transactions

A comprehensive bilateral trade and payments agreement was signed by India in 1953 with the Soviet bloc countries. The deal includes fixed exchange rates as agreed upon by trade partners and the offer of credit by countries that had a trade surplus to countries with a trade deficit.

The Soviet Union’s credit to India enabled the setting up of the Bhilai steel plant, other industrial units, oil refineries and pharmaceuticals — all controlled by India’s public sector. The agreement ended in 1991 following the dissolution of the Soviet Union.

How does India is promoting Rupees for international transactions at present?

The options for invoicing in rupees were already legal in terms of Regulation 7(1) of the Foreign Exchange Management (Deposit) Regulations, 2016.

In recent times, India has been taking an active interest in having the rupee used for trade and the settlement of payments with other countries. This includes Russia as well.

The Reserve Bank of India has recently taken a proactive stand to have a rupee settlement of the trade. The current circular aims to operationalise the special Vostro accounts with Russian banks in India to promote trade and gain a better status for the rupee as an international currency.

What are the challenges of using Rupees for international transactions?

These include 1) Lack of willingness of private parties (companies, banks) to accept the rupee for trade and settlements, 2) Challenge in agreeing to a common exchange rate between the rupee and the foreign country. For instance, the exchange rate between the rupee and the ruble (R-R), 3) Promoting Russian Ruble and Indian Rupee trade deals, especially on oil, can be considered by the West as India’s ‘indirect back door support’.

What are the advantages of using Rupees for international transactions?

a) India can avoid transactions in the highly-priced dollar which has an exchange value of ₹80, b) Provide stability to the Indian economy and prevent inflation and capital flight and c) Prevent the drop in foreign exchange reserves.

The R-R exchange rate can benefit both trade partners and counter the ongoing currency hierarchy.