According to a senior official, India settled international trade worth more than $2.5 billion in rupee last year after the Reserve Bank of India (RBI) facilitated the process.
The majority of trade settlements in rupee were with countries such as Russia, Sri Lanka, and a few others. However, while this highlights growth in rupee trade, it falls short of initial expectations. Trade experts anticipated rupee-denominated exports to reach $8-10 billion after the introduction of the RBI mechanism in July.
The imposition of western sanctions on Russia created a strong demand for Indian goods, spurring the rupee-rouble trade arrangement. As a result, 106 Special Rupee Vostro Accounts (SRVA) were opened by banks from 22 countries in Indian banks. Prior to the RBI initiative, trade settlement in the rupee was limited to transactions with Nepal and Bhutan.
Although the majority of India’s trade with other nations is conducted in US dollars, smaller amounts are settled in other fully convertible currencies such as the Euro, Sterling Pound, and the Yen.
The RBI’s move to enable rupee-denominated trade settlement was part of a larger policy to reduce dependence on the dollar and position India as a prominent player in the global economy.
This effort aligns with a broader aim to challenge the dominance of the dollar as the primary global reserve currency, particularly from a Global South perspective. Consequently, the Foreign Trade Policy was amended to allow for international trade settlement in rupees.
Countries like Russia, Germany, Singapore, Oman, Bangladesh, the UK, Kenya, and Israel have opened Vostro accounts in Indian banks, showcasing the increasing scope of rupee trade. India’s trade with Russia has seen considerable growth, primarily driven by petroleum crude imports. Crude oil imports accounted for around $31 billion out of the total $46.2 billion in imports, with India’s exports to Russia totalling $3.1 billion.
Notably, trade in oil is settled in international currencies due to the absence of sanctions.
Sri Lanka has included the Indian rupee in its list of designated foreign currencies, while a new mechanism has been launched with Bangladesh to facilitate rupee settlements. With exports to Sri Lanka reaching $5.1 billion and imports at $1 billion, the inclusion of the rupee aims to strengthen trade ties.
Moreover, Bangladesh ranks as India’s fifth-largest export market, with exports amounting to $11.6 billion, and India is the country’s second-largest import source after China.
Furthermore, there has been a significant shift towards conducting trade in Indian currency with Nepal, while all trade with Bhutan is settled in rupees. A Memorandum of Understanding signed between India and the United Arab Emirates (UAE) during Prime Minister Narendra Modi’s visit in July this year will establish a Local Currency Settlement System.
This system will cover current account and permitted capital account transactions, allowing importers to pay in their local currencies and fostering the development of the Indian Rupee (INR)-United Arab Emirati Dirham (AED) market. The UAE represents India’s second-largest export market.
India is also in talks with Saudi Arabia, another crucial trading partner, to transition trade settlements to local currencies. With exports to Saudi Arabia reaching $10.2 billion and imports amounting to $42 billion, the dominance of crude oil in India’s imports from this country is evident.
Overall, with India’s total merchandise trade for FY23 amounting to $1,161 billion, the $2.5 billion in local currency trade only scratches the surface of the potential for further expansion.
