Context

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.

Currency hierarchy

• For India, currency hierarchy goes back to colonial times when the Indian rupee was virtually linked to the British pound rather than to gold which it earned through exports.
• In the post-War period, the neo-colonial currency hierarchy has been clubbed with the continued use, primarily of the U.S. dollar, for the majority of international transactions.

Rupee settlement of trade

• 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, which include Russia, now facing sanctions.
• The Reserve Bank of India has recently taken a proactive stand to have rupee settlement of trade (circular dated July 11, 2022).
• While options for invoicing in rupees were already legal in terms of Regulation 7(1) of the Foreign Exchange Management (Deposit) Regulations, 2016, the current circular aims to operationalise the special Vostro accounts with Russian banks in India, in a bid to promote trade and also gain a better status for the rupee as an international currency.

Opportunities for India

• The advantages India is currently seeking in these arrangements include avoidance of transactions in the highly priced dollar which has an exchange value of ₹80, impacting the Indian economy with inflation, capital flight and the drop in foreign exchange reserves by $70 billion since September 2021.
•  Buying oil with a depreciated ruble, and at discounts, is not only cost-saving but also saves transport time with the use of multi-modal routes using land, sea and air routes.
• In addition, India is looking forward to trade expansion in sanctions-affected Russia.
• With India having a trade deficit with Russia, which has been around $3.52 billion on average over the last two financial years, India’s opportunities include the possible use, by Russia, of the surpluses in the Vostro rupee account in Russian banks for additional purchases from India.
• Past attempts: Attempts to use the rupee for invoicing and trading is, however, not new to India.
• A comprehensive bilateral trade and payments agreement was signed by India in 1953 with the Soviet bloc countries.

Challenges

• There are quite a few problems that may prevail in implementing the desired rupee payments and avoiding dollar transactions.
• Willingness of banks and private parties: Apart from issues that concern an agreed exchange rate between the rupee and the ruble (R-R), two volatile currencies, there is also the question of the willingness of private parties (companies, banks) to accept the rupee for trade and settlements.
•  If Russia opens its door for exports from India, the ‘R-R’ route may prove attractive for Indian exporters.
• Concerns of the US: There are official concerns for reactions, particularly from the U.S., to deals, especially for purchase of the S-400 defence equipment.
• Reaction of the Europe: Moreover, the deals between India and Russia, especially on oil, can be considered by the West as ‘indirect back door support’ — as India is importing Russian crude at 30% discount, processing at refineries in Gujarat which include Reliance, and then exporting those to the West.
• Trade deficit: There were attempts even before the novel coronavirus pandemic to initiate a clearing account on the BRICS platform.
• The quantitative implications indicate a skewed pattern of transactions — with China having most of the trade surplus.
• It is a pattern similar to what is happening in India-Russia trade at the moment.

Conclusion

The India-Soviet agreements of the past may provide a clue on how the current ‘R-R’ trade and the problems can be managed by initiating a push for Indian exports to Russia and, of course, avoiding all deals in dollars — benefiting both trade partners and countering, globally, the on-going currency hierarchy.

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