The move could ease settlements with countries with low US currency reserves
The Indian rupee’s global ambitions could ease trade settlements with other nations, a former official from the country’s central bank has said.
Asia’s third-largest economy, and one of the world’s fastest growing, is pivoting away from its dollar dependency to ensure its foreign exchange reserves remain stable. Last month, India’s forex reserves edged up to nearly $600 billion, a one-year high.
“India is trying to make the rupee easier to be a currency of transaction and payments with its partners for its own trading needs,” Usha Thorat, a former deputy governor at the Reserve Bank of India (RBI), said in an interview with Bloomberg’s Rishaad Salamat and Haslinda Amin on Thursday. She claimed, however, that “India is not aspiring to make the rupee a reserve currency.”
The use of the rupee as a trade settlement alternative augurs well for countries facing a shortage of the greenback in Asia, Africa and beyond, while a paradigm shift in policy mechanism could shield Indian trade and businesses from exchange risks amid global volatility.
Thorat, who served at the RBI for five years until 2010, also weighed in on India’s global trade prospects, and said its current share of world trade, both exports and imports, is around 7%. “Similarly the share in financial flows is also around the same. It will take a long time for India to get a dominant position in global trade,” she added.
However, earlier this year, M Rajeshwar Rao, a deputy governor of the RBI, insisted that India needed to gear up to manage the inevitable volatility that would emerge in the foreign exchange market as the country progresses further towards internationalization of the rupee.
“It is now widely accepted that while internationalization and a freer capital account comes with its own set of benefits, it is not without risks,” he warned. Rao did not elaborate on how to manage the dangers, but explained that “freer capital flows come with their own set of challenges, the primary one being that of volatility and we need to gear up to manage that.”
Meanwhile, India’s rupee trade settlement mechanism, which was set up by the RBI last July, is attracting several countries. Russia has pivoted towards this payment arrangement following US-led Western sanctions imposed after Moscow launched its military operation in Ukraine.
The de-dollarization bid is a win-win for countries such as sanctions-hit Russia and bankrupt Sri Lanka because it saves conversion expenses and acts as a buffer against foreign exchange rate fluctuations.
So far, 35 nations have expressed interest in better understanding the rupee trade mechanism. The rupee’s bid to become an international currency is likely to reduce India’s growing trade deficit, which stood at $22.12 billion until last month, and also make it stronger in a global market that is facing hyperinflationary headwinds from the West since the Ukraine crisis erupted.
According to the RBI, trade settlement in rupees would reduce dependencies on fully convertible currencies such as the dollar, euro and yen. The Indian rupee’s globalization move could not have been timed better as there has been a significant jump in trade in oil and other commodities in currencies such as the Chinese yuan and the UAE’s dirham.
June 22, 2023 at 10:28PM