Government’s Push to Promote International Trade in Rupee

In News: In July, the RBI issued a circular saying it had decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/ imports in INR.

Purpose

• To promote the growth of global trade with emphasis on exports from India.
• To support the increasing interest of the global trading community in INR.

Observation: While the move to allow trade settlements between India and other countries in rupees was seen to primarily benefit trading with Russia, it was also expected to help check dollar outflow and slow the depreciation of the rupee to a “very limited extent”.

What is the Current System?

• Currently, exports or imports by a company are always in a foreign currency, with exceptions such as Nepal and Bhutan.

How can we make it work?

• To settle trade transactions with any country, banks in India would open Vostro accounts of correspondent bank/s of the partner country for trading.
• Indian importers can pay for their imports in INR into these accounts.
• These earnings from imports can then be used to pay Indian exporters in INR.

A Vostro account is an account that a correspondent bank holds on behalf of another bank — for example, HSBC Vostro account is held by SBI in India.

What is the Expected use?

• With Russia: There are sanctions on Russia post the Ukraine war and the country is off the SWIFT system (system used by banks for payments in foreign currency).
• This means payments do not have to be made in foreign currency and this arrangement would help both Russia and India.
• With other countries: The chances are slim as others may not accept it as they may need foreign currency to pay for their own imports. In fact, Sri Lanka may also want us to pay in dollars or any other foreign currency.
• To arrest the fall of the rupee: The arrangement was not expected to help arrest the fall of the rupee to any significant extent.

Why is the Rupee falling?

• Demand and supply: If a country imports more than it exports, then the demand for the dollar will be higher than the supply and due to this, domestic currency will depreciate against the dollar.
• Russia-Ukraine war: Global disruptions caused by the Russia-Ukraine war is making our imports costly, thus widening the current account deficit.
• Rising inflation: Rising inflation depreciates domestic currency since inflation can be equated with a decrease in money’s buying power.
• As a result, countries experiencing high inflation tend to also see their currencies weaken relative to other currencies.
• High crude oil prices: Increasing crude oil prices are further widening our trade deficit thus leading to decrease in the value of rupee.
• Capital outflows from India:
• The US Federal Reserve recently increased the interest rates, and the return on dollar assets increased compared with those of emerging markets such as India.
• It has led to outflow of dollars from India to the US.

Impact of the Fall of the Rupee

• Increases cost of raw materials and imports
• Since, India imports many raw materials, the price of finished goods could go up thus impacting the consumers.
• India’s high import dependence for fuel means oil price trajectories affect most macro parameters, including inflation, growth, current account balances, fiscal management and the rupee.
• This leads to widening of the current account deficit (CAD).
• Boosts exports:
• In an ideal scenario, devalued rupee could have led to increase in exports.
• However, in the current scenario of weak global demand and persistent volatility, exporters are not supportive of the currency fall.
• Inflation:
• The falling rupee’s biggest impact is on inflation, given India imports over 80 per cent of its crude oil, which is the country’s biggest import.
• Travellers and students studying abroad will have to shell out more rupees to buy dollars from banks.
• Stock market:
• Rupee depreciation may see foreign investors pulling out of Indian markets, resulting in a decline in stocks and equity mutual fund investments.

Source: The Indian Express

Previous Year Question

Q.1) With reference to the Indian economy, consider the following statements: (2022)

1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.

Which of the statements given below is/are correct?

1. 1 and 2 only
2. 2 and 3 only
3. 1 and 3 only
4. 1, 2 and 3