Finance

Rupees Can Be Used As International Trade Settlement

Rupees Can Be Used As International Trade Settlement

The Reserve Bank of India’s efforts to stabilize the rupee and limit the use of the US dollar (a decade-old practice that seems to be unwavering in most of the world) are now off to a serious start for the central bank. Allows Rupees to claim international trade.

The Reserve Bank of India (RBI) allows rupees to claim and pay for international trade, faces many western sanctions and is virtually separated from the usual cross-border payment platform with Russia on a larger scale. May promote bilateral transactions. “It aims to promote the growth of world trade, centred on exports from India, and to support the growing interest in the Indian Rupee from the global trading community,” RBI said.

¬†“This is to allow for a larger trade in rupees. Previously, billing in rupees was allowed, but it was not allowed to return excess rupees to the rupee balance, so it is less popular. There was not. Now they are. For currencies to be globally accepted, capital flows and trade must be closely linked and liberalized, “said Anindia Banerjee, Vice President of Currency and Interest Rate Derivatives at Kotaku Securities, Business Insider India. Told to.

 But what exactly does that mean? This will be explained in simple terms.

What is an international trade settlement of rupees?

¬†When a country imports or exports goods or services, it must pay in foreign currency. Most of these transactions are done in the US dollar because the US dollar is the world’s reserve currency.

 For example, if an Indian buyer makes a transaction with a German seller, the Indian buyer must first exchange rupees for US dollars. The seller receives these dollars, which are converted into euros.

 Here, both parties must bear the conversion costs and bear the risk of exchange rate fluctuations.

 Here, the trade settlement in rupees is made. If the other party has a Rupee Vostro account, you will be invoiced in Indian Rupees instead of paying or receiving US dollars.

Rupees

 The decision to allow international trade of rupees aims to promote trade between Sri Lanka, which lacks foreign exchange reserves, and Russia, which cannot pay in US dollars due to Western sanctions.

What are Vostro and Nostro accounts?

 To accept payments at Rs, authorized Merchant Banks can open a special Rs Vostro account. The rupee Vostro account is a foreign bank account with an Indian bank denominated in Indian rupees.

 For example, HSBC, which has a Rupee-denominated account at the State Bank of India at the Mumbai branch,  is called a Rupee Vostro account.

 Foreign parties can send and receive money to and from Indian exporters and importers through these Rupee Vostro accounts.

On the other hand, a Nostro account means a foreign currency account of an Indian bank with an overseas foreign bank. It’s like SBI has a Sterling-denominated account at HSBC in London.

 Why does  RBI want to process payments in rupees?

¬†This move helps reduce India’s dependence on the US dollar. Experts spoken by Business Insider India said the decision would not have a significant impact in the short term but would benefit the country in the long term.

¬†” It is unlikely to have a significant impact on the USDINR value in the short to medium term. In the long run, we will shift some of the demand from the US dollar to the rupee. However, the impact of this USDINR will be very modest, “Kotaku Securities’ vice president of currency and interest rate derivatives, Anindia Banersey, told Business Insider India.

The sanctions against Russia due to the war between Ukraine and the West, and the subsequent separation of Russia from the SWIFT payment system, are probably one of the motivating factors for this decision.

 In an interview with Business Insider India, currency research analyst Heena Naik said that the current crisis in Ukraine and Russia and the sanctions imposed on Russia were truly extraordinary for countries that are trying to reduce their reliance on the US dollar.

¬†Because India has a trade deficit (imports are more than exports), trading at the rupee can also save dollar outflows. It is even more important for the RBI to save the dollar outflow when the rupee’s value is declining weekly against the US dollar.

Rupees

Avoiding the SWIFT payment system and paying imports in rupees also help India avoid the sanctions imposed on its trading partners. Russia is up to date and Iran is another notable example of the past.

 How much can India save with this decision?

¬†According to the latest trade data, India’s imports from Russia totalled $ 2.5 billion in April and May. That’s $ 30 billion a year, and according to experts, it could be as much as $ 36 billion a year.

 In the best scenario, paying all imports from Russia in rupees would save $ 30-36 billion in outflows to India.

 In context,  RBI has recently spent $ 40 billion to stabilize the rupee and could spend another $ 40 billion.

Rupee as an international currency

¬†Currencies are commonly referred to as “international” when they are accepted as a medium of exchange for trade around the world.

The US $ is the most widely accepted currency in international trade, followed by the European euro.

 In the early 1960s, the rupee was accepted in the Gulf countries such as Qatar, United Arab Emirates, Kuwait and Oman. India also has payment contracts with Eastern Europe, where rupees were used as the unit of account. However, in the mid-1960s, these agreements ended.

Future challenges that are coming ahead

 The rupee can be converted into an international currency by making it a stable currency to promote international trade or by holding it as an asset.

¬†Simply put, the rupee must be the currency that holds the assets. When the rupee becomes an international currency, India’s trade deficit may decrease. Rupees are being strengthened in the global market. In other countries, it is possible to start adopting the rupee as the trading currency.

 However, there are challenges in internationalizing the rupee as a trading currency.

¬†” There are many challenges involved with internationalizing rupees. Sandeep Bagla, CEO of the Trust Mutual Fund, told in India Today.

¬†“The rupee needs to be completely convertible. Unless the market with major financial institutions other than the RBI is strong, large flows can lead to fluctuations in the value of the rupee, which is a monetary policy for central banks. It can be more difficult to set up,” says Bagra.

Rupees

The short-term situation will be challenging.

 India needs to increase exports to other countries.

India also needs to be a manufacturer, as it will greatly help the rupee become a trading currency.

¬†For example, on March 23, this year, Russian President Vladimir Putin announced that European countries would have to pay for all natural gas imports in the Russian ruble, not the US dollar or the euro. Putin has the potential to generate demand, as Russia supplies 40% of the European Union’s natural gas demand. If the rupee is internationalized, India will be truly independent.

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