Encouraging international trade in the home currency will help insulate the rupee from volatility and lower the cost of conducting business in global markets, according to the Economic Survey on Tuesday. According to the poll, it might help Indian exporters obtain rupee advance payments from abroad clients and, in the long run, promote the home currency as an international currency once the rupee settlement system gains popularity.
In July 2022, the Reserve Bank of India issued a circular allowing an additional arrangement for invoicing, payment, and settlement of exports/imports in Indian rupees (INR) to promote the growth of global trade with an emphasis on Indian exports and to support the growing interest in the rupee as an international currency in the global trading community.
The structure entails invoicing exports and imports in rupees, market-determined exchange rates between trade partner currencies, and settlement via special rupee vostro accounts opened with licenced dealer banks in India. With the US Federal Reserve steadily raising policy rates and taking a hawkish stance, international settlement in rupees is gaining importance.
“The framework has the potential to significantly lower net demand for foreign exchange, particularly the US dollar, for the settlement of current account-related trade flows. Furthermore, the usage of the Indian rupee in cross-border trade is projected to reduce currency risk for Indian enterprises “According to the poll.
Following the Russia-Ukraine war and Western sanctions, India has been attempting to encourage rupee commerce.
Currency volatility protection not only lowers the cost of conducting business but also allows for better business growth, increasing the likelihood of Indian enterprises growing abroad.
Currency volatility protection not only lowers the cost of conducting business but also allows for better business growth, increasing the likelihood of Indian enterprises growing abroad.
According to the poll, it also minimises the requirement for foreign exchange reserves and foreign currency dependency, making the Indian economy less sensitive to external shocks.
“Moreover, it might help Indian exporters secure advance payments in INR from abroad clients and, in the long run, promote INR as an international currency once the rupee settlement system develops popularity,” it added.
One of the requirements for the formation of an international currency is that it be increasingly employed for trade invoicing.
According to the BIS Triennial Central Bank Survey 2022, the US dollar is the main vehicle currency in terms of foreign exchange market turnover (daily averages), accounting for 88% of worldwide FX transactions. The Indian rupee accounted for only 1.6% of the total.
“If INR turnover rises to meet the 4% share of non-US and non-Euro currencies in global FX turnover, INR may be considered an international currency, reflecting India’s place in the world economy,” it added.
Indian banks have already opened special vostro rupee accounts (SVRA) with banks in these three countries, putting the rupee trade agreement into action.
SBI Mauritius Limited and People’s Bank of Sri Lanka recently launched an SVRA with the State Bank of India (SBI). Also, the Bank of Ceylon established an account with its Indian affiliate in Chennai.
After authorisation from the Reserve Bank of India, 11 banks, including two from Russia and one from Sri Lanka, created 18 such special rupee accounts (RBI).
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