The Reserve Bank of India (RBI) has introduced a new mechanism where international trades can now be settled in Indian rupees! But will this move prove to be a game changer for India? Let’s find out.
We all know that the US Dollar is a global currency. And why do we call it a global currency? That’s because the US Dollar (USD) is accepted worldwide as a medium of exchange.
So, if India exports goods to any country (except Nepal and Bhutan), the trade settlement is majorly done using US Dollars, British Pounds, Euros, or Yen.
But, on 11th July 2022, the Reserve Bank of India introduced a new mechanism where international trades could now be settled in rupees!
Let’s explore more about it.
What’s Happening?
In the past month, the value of rupee against the US dollar has been gradually decreasing. The Reserve Bank of India has taken various initiatives to support the falling rupee by selling dollars, increasing interest rates on foreign currency deposits, and much more. The internationalisation of the rupee is also one such initiative.
If India engages in an import-export activity with a country and is willing to settle the trade in Indian rupees, then they are free to do so under this mechanism.
Now, because of the rupee trade settlement, there will be less pressure on India’s forex reserve.
But, Who Are India’s Rupee Trade Partners?
After Russia’s invasion of Ukraine, the US imposed various sanctions on Russia, including the inaccessibility to its US dollar deposit. Now, as trades could be settled in Indian rupees, India could easily import oil from Russia and settle the trade in rupees.
But, this is not happening for the very first time. In 2019, when the US imposed sanctions against Iran, India had set a similar mechanism to settle oil trades in rupees.
How Will The Trade Settlements Be Done in Indian Rupees?
To settle international trade in rupees, a Vostro account will be used. In simple terms, this account will be debited and credited whenever a transaction occurs.
In the end, if excess rupee is left in the Vostro account, it can be used for investments in Indian Government Bonds.
This mechanism sounds good, but there is a major drawback to it as well.
Major Drawback
Now imagine, if India imports oil worth Rs 100 billion from Russia and the trade is settled in rupees, then Russia must also have similar import needs from India. Or else, Russia will be left out with huge cash in rupees which cannot be used for further trade settlements with other countries because of less acceptance of the Indian rupee for foreign trades.
What Lies Ahead?
This mechanism will successfully work if we have a cluster of countries ready to trade in rupees with India and among themselves. By doing so, the dependency on the US dollar will automatically decrease, and the Indian rupee might also move towards stability.
That’s it for today.
I hope you found this information insightful.
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