Overview – India’s Rupee Trade Approach
India has been actively trying to expand the rupee-based trade beyond borders. Internationalizing the Indian rupee helps shield the currency fluctuations, trade restrict ions, and manage geopolitical risks associated with the dollar. A robust rupee-based trade strategy protects Indian businesses from unnecessary dollar fluctuations, protects from US sanctions, and emerges as one of the major global currencies. This article delves into how India is advancing rupee-based trade agreements with a balanced approach and instead of outrightly rejecting the dollar.
India’s Rupee Trade Strategy: Agreements with Key Partners
India-Russia Trade: When the western sanctions were imposed by the U.S., India and Russia adopted rupee-ruble trade for oil, defense, and other imports. Example: India increased oil imports from Russia using special rupee accounts (Vostro accounts) in Indian banks like UCO Bank and SBI.
India-UAE Trade: In 2023, India and UAE signed a deal to settle trade in rupees to bypass the dollar. Example: The first-ever oil transaction between Indian Oil Corporation and Abu Dhabi National Oil Company (ADNOC) was settled in rupees.
India-Iran Trade: As Iran was suffering with the U.S. sanctions, India used a rupee payment mechanism to buy crude oil and export pharmaceuticals and rice. Example: Iran’s oil revenue was kept in Indian banks like UCO Bank, which Tehran used to import Indian goods.
Expanding India’s Rupee Trade in South Asia and BRICS
India-Sri Lanka: India offered credit lines in rupees to help Sri Lanka during its economic crisis and encouraged rupee settlements for trade. Example: Indian banks allowed Sri Lankan companies to open rupee accounts to pay for imports.
BRICS Initiative: BRICS nations are discussing a common payment system to reduce dollar dominance, with India is advocating for greater rupee use in intra-BRICS trade.
India is allowing foreign central banks to hold rupees in their reserves. Example: The Reserve Bank of India (RBI) approved rupee trade settlements with 18 countries, including Russia, Sri Lanka, and Mauritius. An agreement was signed on an Indian rupee-denominated line of credit extended by State Bank of India, amounting Rs. 487 crores for undertaking the replacement of water pipelines in Mauritius.
Challenges in India’s Rupee Trade Strategy
U.S Diplomatic Pressure: The US is heavily dependent on India for semiconductors, IT and pharma space, making tariffs unlikely. However, the U.S may pressurize India through diplomatic ways through harsh criticisms like previously done on India’s continued oil imports from Russia despite sanctions.
Global Dollar Dominance: Most global trade runs on the dollar, and many countries still hold dollar as reserves. Hence, countries can be reluctant in augmenting rupee as their reserves due to the volatility and convertibility risks. The rupee has limited acceptance in the global world.
Russia’s Vostro Account Challenge: Russia had to park billions of rupees in Vostro accounts (special rupee accounts held in Indian banks). Due to the lack of conversion options, some Russian banks refused to accept additional rupee payments from India. The reason is that the Indian rupee is not freely convertible like the US dollar or euro. Russia cannot easily exchange rupees for other currencies in global forex markets. Russia can only spend these rupees within India, such as buying Indian goods or investing in Indian assets. Russian businesses have limited avenues to deploy such huge rupee reserves.
Partial Rupee Convertibility: Indian rupee is a partially convertible currency. It becomes difficult to buy and sell Indian rupee in the forex market as it needs large approvals. There have been discussions for making rupee fully convertible. This will increase liquidity in the financial markets, improve business opportunities, and easy access to larger pool of capital. However, if rupee gets fully convertible, it will increase volatility, increase the burden of foreign debt and have an impact on balance of trade and exports.
Is India’s Rupee Trade Strategy Feasible?
Yes, absolutely!
India is a key trade partner for the U.S hence it may hesitate to impose tariffs on India to counterbalance China in Indo-Pacific.
India is selectively making choices to expand rupee trade with its allies like Russia, UAE, and Sri Lanka. India still settles most of the trade in dollars ensuring that U.S does not perceive it as a threat. India does not challenge U.S dollar but gradually wants to internationalize rupee.
India is coordinating rupee-based trade within BRICS, which collectively reduces reliance on the dollar. The BRICS Pay system and potential BRICS currency discussions provide alternative trade pathways.
India is paving its way towards strengthening domestic manufacturing and exports to make the rupee more attractive globally. Finance Minister Sitharaman has stated that Indian rupee is far more stable than most of the currencies now. Many countries want to have trade relations on rupee trade which is evident through the macroeconomic stability in India. India has received the highest FDI beyond USD 600 billion matching our forex reserves. Taxation policies are a lot more predictable, and systems are a lot more transparent. The world wants to engage with us in a big way.
Conclusion
India’s push for rupee-based trade is a gradual shift rather than a challenge to the U.S dollar. By strategically engaging with partners like Russia, UAE, Sri Lanka, Mauritius and other BRICS nations, India is creating an alternative trade mechanism parallel to maintaining strong economic ties with the West.
However, challenges like rupee convertibility issues, trade imbalances, and geopolitical pressures remain. India is boosting manufacturing, exports, enhance global rupee acceptability, and strengthen economic diplomacy to make rupee trade sustainable. While the road ahead is complex, India’s gradual and steady expansion of rupee trade highlights its ambition to reshape global trade dynamics while ensuring economic resilience.
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