Why in the News? 

New Delhi aims to boost trade with Moscow to $100 billion by 2030, but India faces a $57 billion trade deficit due to strong oil imports from Russia.

Why is the widening trade gap with Russia benefiting the Yuan?

• • Increase in Balanced Trade with China: Unlike India, China has been able to maintain a more balanced trade relationship with Russia since the Ukraine war began in 2022.
    • China’s exports to Russia have surged, with shipments increasing by 47% year-on-year to $111 billion in 2023.
    • 95% of trade between China and Russia is conducted in domestic currencies, making the yuan the most popular currency in the Russian stock market.
  • Increase in volatility of Rubble and Rupee:  Unlike the yuan, both the Indian rupee and Russian ruble have experienced considerable volatility, complicating trade in domestic currency.
    • The yuan’s relative stability compared to the rupee and ruble has made it a more attractive currency for settling Russia-India trade

• Reluctance of Private Banks: The Indian private banks have been reluctant to facilitate trade with Russia due to fears of Western sanctions.

• • Most Indian private banks have significant business interests in Western countries and fear their branches could face sanctions if they engage with Russia.
  • As Russia prefers the yuan for payments, India’s limited exports to Russia have hindered the use of the rupee in bilateral trade.

What are the benefits of the Internationalisation of the Rupee?

• Reduced Dependence on USD: Internationalizing the rupee would reduce India’s reliance on foreign currencies like the US dollar for international trade and financial transactions.
  • This would enhance India’s economic sovereignty and reduce exposure to currency fluctuations.
• Enhanced Trade Efficiency: Using the rupee for international transactions can simplify trade processes and reduce transaction costs.
  • Internationalization of the rupee would eliminate the need for currency conversions, reducing transaction costs and simplifying cross-border trade.
• Mitigating Risks: Protection from currency volatility not only reduces the cost of doing business but also enables better growth of business, improving the chances for Indian businesses to grow globally
• Increased Global Influence: A widely accepted rupee would boost India’s economic and political influence on the global stage.

How can India internationalize the rupee?

• The Reserve Bank of India permitted settling trade using the rupee through its circular in July 2022.
• • Trade invoicing: For the rupee to be recognized as an international currency, it needs to be increasingly used for trade invoicing.

• • Trade invoicing refers to the process of issuing invoices for goods or services exchanged between international trading partners. It includes detailing the terms of sale, such as prices, quantities, payment terms, and currencies used for settlement.

• Increase Rupee Turnover: The rupee needs to achieve a global forex turnover share of around 4% to be regarded as an international currency, up from the current 1.6%.
• Government Support: Strengthening industrial cooperation and addressing banking sector concerns can promote the use of the rupee.

Challenges involved:

• Banking Sector Reluctance: Private banks are hesitant to facilitate trade with Russia due to fear of Western sanctions.
• Rupee Settlement Mechanism: Indian exporters face difficulties using the rupee settlement mechanism due to the absence of a Standard Operating Procedure (SOP) for banks.
  • Note: A Standard Operating Procedure (SOP) for banks is a formal document outlining step-by-step instructions for routine processes and activities to ensure consistency and compliance.
• Currency Volatility: Both the ruble and the rupee have experienced considerable volatility, complicating trade in domestic currencies.
• International Sanctions: Private banks’ significant business interests in Western countries make them wary of facilitating trade with Russia.

How are Russia and India planning to boost trade?

• Both countries have decided to eliminate non-tariff and tariff barriers in trade.
  • Negotiations for a trade deal with the Russia-led Eurasian Economic Union (EEU) could ease the flow of Indian products into the EEU.
• Cooperation in manufacturing sectors like transport engineering, metallurgy, and chemicals.
  • Implementation of joint projects in priority areas and expanding reciprocal trade flows of industrial products.
• Discussions on a Migration and Mobility partnership agreement to facilitate trade and movement between the two countries.

Way Forward 

• Enhanced Banking Support and Infrastructure: Develop a robust Standard Operating Procedure (SOP) for banks to facilitate smoother implementation of the rupee settlement mechanism for trade with Russia.
• Strategic Economic Diplomacy: Strengthen bilateral economic ties through high-level diplomatic engagements to mitigate banking sector reluctance and enhance trust between Indian and Russian financial institutions.

Mains PYQ: 

Q Craze for gold in Indian has led to surge in import of gold in recent years and put pressure on balance of payments and external value of rupee. In view of this, examine the merits of Gold Monetization scheme. (UPSC IAS/2015)

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