Trading in rupee can encourage investment in government debt

Under the mechanism, Indian importers will make payments in rupees which will be credited to the Vostro account of the correspondent bank of the participating country. Similarly, Indian exporters will be paid income in rupees from the balance in Vostro account. RBI has allowed the surplus rupee balance in these accounts to be used for payment of projects and investments, exports, imports advance flow management and investments in government securities.

India has a trade deficit of $6.61 billion with Russia, which means Russia will have extra rupees in Vostro accounts. Its trade with Russia stood at $13.1 billion in 2021-22.

Some experts said Russia would be willing to use this route with India, given the nation’s growing importance as a trading partner in the face of Western sanctions against the country. Others, however, are of the view that Russian exporters would not want to hold additional rupee reserves under this policy and, therefore, would have no option but to invest in government bonds.

“They could invest in government securities because every time there would be a surplus, they could either do so or keep reserves in rupees. But holding rupee reserves is not going to give them any returns, and it comes with a risk of 3-4% annual depreciation,” said Abhishek Goenka, founder and CEO of forex advisory services provider IFA Global.

Goenka said that though Russian entities may not be keen on investing in government securities, they have no choice at the moment. The rupee settlement will benefit India, attract cheaper oil from Russia and flow into bond markets where foreign portfolio investors are reducing their stake.

“It will also help the government’s lending program, albeit in a smaller way,” he said.

According to Anant Narayan, Associate Professor of the SP Jain Institute of Management and Research (SPJIMR), if the bulk of India-Russia trade falls under this rupee settlement route, the net trade with India’s banking system is comparable to that of Russian banks with India’s banking system. will remain as the remainder. Investments are to be made in Indian assets like government securities.

“This will substantially reduce India’s hard currency outflow, and at the same time, provide a welcome demand for India’s bonds,” Narayan said. Meanwhile, bankers said opening bank accounts would take some time and they would have to take RBI’s nod for each counterparty. This, he said, would be possible only for parties outside the OFAC sanctions list. Enforced by the US Office of Foreign Assets Control (OFAC), the sanctions were implemented following Russia’s invasion of neighboring Ukraine in February. Indian banks have long expected the government and the RBI to work out an alternative payment mechanism, as it did in 2012 and again in 2018 when Iran sanctions were imposed.

“Russia may be interested in using the Indian rupee because, from what I understand, they have a large cache of untapped currency. The Indian government had suggested that it could invest this money in capital projects in India, But I understand that Russia may not be eager to do so,” said Madhu Nanan, a commentator and editor of the oil and gas intelligence website PetroWatch.

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