There is a need to push greater settlement of trade transactions in local currencies
INDIA’S EFFORTS to promote settlement of transactions in rupees since July 2022 to facilitate more trade with Russia and neighbours like Sri Lanka appear relatively modest at only $2.5 billion. There is a need to aggressively push for greater settlement as trade experts expected this to rise to $ 8-9 billion, for starters. Payment for even a part of India’s huge import bill in rupees would definitely ease the strains on its current account. Much of the trade settlement in rupees so far has been with Russia, Sri Lanka and few other countries including the UAE. Recently, India’s refiner, Indian Oil Corporation, paid in rupees for the purchase of a million barrels of oil from the Abu Dhabi National Oil Com- pany. This follows another deal involving the sale of 25 kg of gold from a UAE-based exporter to an Indian buyer for approximately 12.84 crore. India’s drive to promote trade settlement in local currencies, however, has a relatively greater chance of succeeding in its immediate neighbourhood as several countries have reduced foreign exchange buffers to pay for their essential imports.
Sri Lanka is a case in point and it has included the Indian currency unit in its list of designated foreign currencies. With Bangladesh, a new mechanism has been launched in July to trade in rupees. However, this drive hasn’t worked according to the script in the case of Russia. Although the rupee-rouble trading arrangement is in place, with the RBI approving the opening of special vostro accounts by several banks, Russia prefers the payment for oil in hard currencies to fund its ongoing war in Ukraine. Even a partial settlement in rupees would have made a big difference for India’s burgeoning oil imports from Russia that rose 14-fold to $31.02 billion in FY 23 from $2.2 billion in the previous fiscal.
India is now rejecting pressure from Russia to pay for oil with the Chinese yuan. So long as the oil was sold below the price cap of $60 a barrel, India had no problem in paying for it in US dollars. But all of that has changed with Russia’s Urals blend hitting higher levels than the price cap, forcing India to explore other options, including trading via Singapore and Hong Kong. Indian refiners have also paid for Russian oil with UAE’s dirham but that is not Russia’s preference due to greater scrutiny by western nations. For such reasons, India has a problem in settling its trade transactions with Russia, which has accumulated a lot of rupees and is struggling to use these funds as the currency unit is not fully convertible.
The upshot is that Russia and India need to discuss the modalities for settling their bilateral trade and make the rupee-rouble trading arrangement work considering their long-standing strategic partnership. India must simultaneously step up its efforts to push the settlement of trade in rupees in other countries, besides the neighbourhood. As many as 106 special rupee vostro accounts have so far been opened by banks from 22 countries in Indian banks. This is a good base to take the settlement numbers beyond $2.5 billion. Looking ahead, India must promote the global acceptance of the rupee through its inclusion in the continuous linked settlement initiative which provides protection for cross-currency settlement in 18 currencies if efforts to settle trade transactions in rupees are to gain traction.