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New international trade settlement mechanism of the Indian Rupee

On July 11, the RBI introduced a new mechanism for settling international trade in Indian rupees, which was announced to be effective immediately. The introduction of this measure means that all import and export trade can be settled and invoiced in rupees under the terms of international trade rupee settlement. Through this mechanism, Indian importers will be able to pay overseas sellers in rupees, while Indian exporters who export goods and services will be able to earn in rupees from special accounts designated by correspondent banks in partner countries. According to the RBI, the mechanism was introduced to boost global trade growth, increase the interest of the global trading community in the Indian rupee and promote Indian exports. The president of the Federation of Indian Export Organizations also said that at a time when many countries are facing foreign exchange shortages, India’s move “will help our importers and exporters” and is “a recognition of the Indian rupee’s status as an international currency. As the world’s sixth largest economy, the Indian central bank’s sudden introduction of the international trade rupee settlement mechanism has also sparked concern and thoughts on the motives behind it.

At present, the most widely circulated currency in international trade is the U.S. dollar. In many people’s view, this India’s action seems to have the intention of challenging the dollar hegemony. But many media and experts believe that the mechanism is India’s latest move to stabilize the rupee exchange rate.

With the recent increase in international commodity market prices, India’s trade deficit is expanding, foreign exchange reserves are rapidly depleted, and the rupee against the dollar exchange rate continues to be under pressure. 2022 since, the rupee against the dollar exchange rate has fallen by more than 6.4%. India has chosen to launch this settlement mechanism at a time when the rupee has fallen to historic lows, undoubtedly to curb the demand for foreign exchange and thus achieve the purpose of supporting India’s currency.

In addition, there are also arguments that the international trade rupee settlement is conducted to promote India’s trade with Russia and with neighboring countries.

Since the outbreak of the Russia-Ukraine conflict, Western countries have imposed a large number of sanctions on Russia, resulting in poor export channels for the latter. In this situation, India has been taking advantage of the opportunity to increase its imports of Russian oil. In addition to obtaining oil at lower prices, India can also process this oil into diesel fuel and then ship it to the European market for sale, earning the price difference. Therefore, maintaining the oil trade with Russia is of considerable interest to India. The president of the Indian Engineering Export Promotion Council (EEPC) pointed out that the establishment of the rupee international trade settlement mechanism facilitates the elimination of dollar exchange rate risk, but also promotes trade with Russia and other sanctioned countries.

Regardless of the motivation, India’s initiative still has some potential problems.

Barclays chief India economist analysis pointed out that in the long run, this measure will make the rupee in foreign trade more, “For neighboring countries, as well as those countries that intend to use the rupee in the settlement as the base currency of trade diversification, is very beneficial.” However, this mechanism has been questioned when it comes to feasibility.

India Today reports that the rupee is not a currency as widely circulated in international trade as the dollar and the euro, and its internationalization is “easier said than done. Business Standard quoted experts as saying that while India could engage in rupee-led trade with sanctioned countries, which could be a win-win for India-Russia trade, India’s diplomatic relations with these countries would determine whether they could participate in such settlements. Second, large inflows could lead to fluctuations in the value of the rupee and could make it difficult for the RBI to formulate monetary policy.

To make the rupee a truly internationalized trade currency, India needs to start exporting more products to other countries and become a “manufacturer”, which still needs a long way to go.

By Josie

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