Faced with a growing trade imbalance and the inability to settle trade in rupees with Russia following the Ukraine crisis, the Reserve Bank of India (RBI) has finally decided to implement a new system for invoicing, payment, and settlement of exports and imports in Indian rupees. This policy move will go a long way toward promoting the rupee as a trade settlement currency.
The notion of international settlement in rupees has long been in policymakers’ thoughts, but the fundamental concern has been the attractiveness of rupees for exporters and importers. Events like the Russia-Ukraine conflict, the abrupt increase in the current account deficit following the Covid, and geopolitical developments have intensified this trend. Consider how the sharp growth in global commodities, particularly oil imports, has driven the trade and current account deficit (CAD) to worrying levels.
The CAD is predicted to more than treble to $100 billion in 2022-23, according to one projection. The higher CAD comes at a time when global interest rates are rising, with the RBI raising short-term rates by 90 basis points to 4.90 percent in order to combat inflation.
Rising global interest rates have already caused international investors to withdraw their funds. The final effect is on the value of the rupee against the dollar. In 2022, the rupee has devalued by almost 6%. According to experts, the larger challenge in reaching an agreement between the two trade partners would be the exchange rate or the number of nations prepared to adopt a rupee arrangement.
The RBI has stated that the exchange rate between the currencies of the two trade partners may be established by the market. However, analysts believe that this is only conceivable if the two trading partners engage in significant two-way commerce (both export and import).
Post Your Comments