Using the Rupee Way to Get Around a Dominating Dollar

Many countries including India are now considering the use of other currencies to avoid U.S. Dollar and its major role in settling international transactions. As far as India is concerned, the currency hierarchy goes back to colonial times when the Indian rupee was virtually tied to the British pound rather than gold earned through exports. In the post-war period, the neo-colonial currency hierarchy has been associated with the continued use of the US dollar, primarily, for the majority of international transactions. The current situation, apart from geopolitical development, is related to Russo-Ukraine War At the forefront of the sanctions imposed by the West on Russia.

current scenario

In recent times, India has been taking an active interest in using the rupee for trade and settlement of payments with other countries, including Russia, which is now facing sanctions. Earlier also, similar sanctions were imposed against Russia for some time as a result of the annexation of Crimea in 2014. Settlement of payments by India with Russia, especially for mineral fuel and oil imports as well as for the S-400 Triumph air defense system, by way of payment of Rs. Continuing on an informal basis. reserve Bank of India ED has recently taken a proactive approach towards settlement of the business of Rupees (Circular dated 11th July, 2022). While the option of invoicing in Rupees was already legal in terms of Regulation 7(1) of the Foreign Exchange Management (Deposit) Regulations, 2016, the present circular is aimed at operating special Vostro accounts with Russian banks in India, so as to promote Bid can be made to give. The rupee also enjoys a better position as a trade and international currency.

potential benefits

The benefits India is currently looking for in these arrangements include avoiding transactions in high-priced dollars, which have an exchange value of ₹80, with inflation affecting the Indian economy, capital flight (in interest rates by the Fed). Affected by hikes and potential increases in the EU as well) and a $70 billion decline in foreign exchange reserves since September 2021. Buying oil with depreciating rubles, and at a discount, is not only cost-saving, but also saves transportation time with the use of multi-modal routes. Land, sea and air routes. In addition, India is expecting trade expansion in sanctions-hit Russia (which is leading to slowdown and de-industrialization there). As mentioned by Alexei Yusupov in IPS Journal On 20 July, the effects of sanctions on Russia included an L-shaped stagnation in GDP, with de-industrialization and unemployment falling from 10% to 15% (largely behind most Western companies from the country). decline in production of sharp steel, wood and automobiles due to withdrawal). With India having a trade deficit with Russia, which has averaged around $3.52 billion over the past two financial years, India’s opportunities include the potential use by Russia of surpluses in the Vostro Rupee account in Russian banks for additional purchases from India. . , Such purchases may include not only pharmaceutical products and electrical machinery (which are currently the major items of India’s exports to Russia), but also a range of products that Russia may require, particularly In order to overcome the difficulty that comes with sanctions.

some obstacles

There can be quite a few problems in implementing the desired rupee payment and avoiding dollar transactions. Apart from issues relating to an agreed exchange rate between the rupee and the ruble (RR), the two volatile currencies, there is also the question of the willingness of private parties (companies, banks) to accept the rupee for trade and settlements. Will they be willing to leave the greenback? Of course, if Russia opens its doors for exports from India, the ‘R-R’ route could prove to be attractive to Indian exporters. Finally, there are official concerns for responses, particularly from the US, to deals, particularly the purchase of S-400 defense equipment. And the fear continues even after the recent Congressional approval of those purchases as a special case in the backdrop of Chinese aggression. In addition, between the deals India and Russia, especially on oil, may be perceived by the West as ‘indirect back door support’ – as India is importing Russian crude at a 30% discount, processing at refineries in Gujarat that include Reliance , and then exporting them to the west. as reported by economic times (June 13, 2021), in May 2021 such exports amounted to $1.5 billion per day. These companies are exporting to the West with ‘strong refining margins’, as noted by Alex Lawson. Guardian (22 June).

Attempts were made to start clearing accounts on the BRICS platform even before the novel coronavirus pandemic. An analysis by the author in EPW Quantitative implications indicate a heterogeneous pattern of transactions – China has most of the trade surplus. This is a pattern similar to what is happening in India-Russia trade at the moment.

noteworthy example

However, the attempt to use the rupee for invoicing and trading is not new to India. A comprehensive bilateral trade and payments agreement was signed by India with the Soviet bloc countries in 1953 (including those that later became part of the Commonwealth of Independent States). Important aspects of the arrangement included: participation of business units; Fixed exchange rates as agreed by trading partners, and loans offered by countries that had a trade surplus to countries with trade deficits. In general, most bilateral agreements were marked by scissors-like operations on an ongoing basis, correcting imbalances as the surplus country was importing more than the deficit partner, or by offering credit to the latter. was. The Soviet Union’s credit to India enabled the establishment of the Bhilai Steel Plant, other industrial units, oil refineries and pharmaceuticals – all controlled by India’s public sector. The agreement ended after the dissolution of the Soviet Union in 1991, leaving behind some issues of a surplus of the rupee and the ‘R-R’ rate of exchange.

However, history goes on. Market economies in much of the world today deny the possibility of keeping the state or the public sector at the centre-stage. But still, the Indo-Soviet agreements of the past may provide clues as to how the current ‘R-R’ trade and problems were managed by giving a push for Indian exports to Russia and of course avoiding all deals in dollars. – Benefit both trading partners and countering, globally, the ongoing currency hierarchy.

Sunanda Sen was Professor at Jawaharlal Nehru University, New Delhi