Rupee-nization – An Alternate or De-dollarisation
Keywords: rupee-nization, India, de-dollarisation, trade, financial transactions
The world economy is witnessing a global trend which involves reducing the reliance on the US dollar for engaging with financial transactions and international trade. This particular trend involves making a shift towards bilateral currency agreements which would further involve making use of domestic currencies for trade and presenting an alternative to the US dollar (Gouvea & Gutierrez, 2023). Hence, this entire trend of reducing dependence on the US dollar for trade and transactions is termed as de-dollarisation. On the other hand, Rupee-nization, which is also referred to as rupeefication, is a strategy that is aimed at the promotion of the Indian Rupee (INR) in international trade and financial transactions (Dash et al. 2019). This particular strategy will enable trading partners to make necessary transactions in INR while issuing financial instruments to foreign players which are denominated in INR and in turn providing greater access to INR in the global market. Rupee-nization can provide several benefits to the Indian economy but the success of the strategy depends on various factors. Hence, the aim of this article is to provide a broader perspective on rupee-nization while exploring its perception as a move towards de-dollarization or understanding whether it is an alternative to trading with various key partners.
Rupee-nization and its perception as a move towards de-dollarisation
As mentioned, rupee-nization involves the internationalization of the INR with its promotion to be used in international trade and transactions. The entire process is something that would enable trade partners to make transactions in INR and have greater access to the Indian currency (Eagleton, 2022). The primary objective of rupee-nization is to improve the status of INR as a global currency and reduce the dependence of the economy on the US dollar. This move is further aimed at improving the resilience of the Indian economy and achieving autonomy at the global stage. Even at the BRICS summit in August 2023, one of the challenging action areas that was discussed was the establishment of an integrated payments system and de-dollarisation of trade (CNBCTV18, 2023). The focus of the summit was the deliberation of the possibility of a common currency for trade and transactions among the nations but India withdrew itself from such an arrangement negating the significance of BRICS currency. This was generally because of the multi-billion dollar trade agreements that India has with Europe and the US while performing well among the BRICS nations. India’s stance on BRICS currency does not imply that it is reluctant to de-dollarize its economy since a circular was issued by RBI in July 2022 which involved making arrangements for invoicing, payments and settlements of imports and exports in INR (Patnaik, 2022). However, the circular of July 2022 was generally initiated for the import of crude oil from sanction strike Russia along with Russia’s interest to accept payments in INR which significantly reduced the import burden on India. Nonetheless, India is tirelessly working towards developing systems that can bypass the dollar and strengthen the economy of the nation. India is entering into trade agreements with multiple nations to settle the trade in domestic currencies and looking to strengthen the position of INR in the global market. The most recent agreement in this context was made with the United Arab Emirates (UAE) where both nations signed a MoU which facilitates an increased use of domestic currencies INR and AED for bilateral trade. The Comprehensive Economic Partnership Agreement (CEPA) signed between the two nations further led to a rise in bilateral trade between the nations by 27.5% (Economic Times, 2023). Similarly, in a recent interview, Finance Minister Nirmala Sitharaman said that India is in discussion with 22 nations for bilateral trade to be done in INR (Economic Times, 2023). Hence, based on the steps taken by the Indian government, it can be said that rupeefication is an alternative to the US dollar for better economic resilience.
Pros and cons of Rupee-nization
Rupeenization offers numerous benefits to India while having some drawbacks in the process for the economy of the nation. The pros of rupee-nization are-
- Reduced risks for exporters- Rupee-nization would reduce the risk exposure of exporters or traders to exchange rates at the global level. Invoicing the entire trade using INR would help traders avoid the uncertainty associated with fluctuating exchange rates while improving their predictability related to earnings (Sanati, 2022).
- More control over the domestic monetary policy- The growing acceptance of INR would help India exercise more control over its domestic monetary policy. Policies that are specific to the needs of the nation can be developed with the help of rupee-nization.
- Better trade relationships and increased market access- This will provide an opportunity for traders to tap into new markets and expand their consumer base. Better relationships with various nations will be developed and wider access will be provided with the help of rupee-nization.
- Less borrowing costs of the private sector- The private sector will have access to the international financial markets with lower borrowing costs with the acceptance of INR. This will further improve businesses' profits and investment opportunities at various levels.
- Microeconomic growth and livelihoods- Rupee-nization will further aid the growth of the private sector and this, in turn, will contribute to increased economic activities and job opportunities. The livelihoods across various sectors in the country would further improve with the help of this step.
Despite the numerous advantages and benefits offered by rupee-nization to the Indian economy, there are also certain drawbacks and challenges involved with the entire process. Hence, the cons of rupee-nization are-
- Limited acceptance at the global level- Ensuring that the INR is accepted at the global level might be quite challenging since the majority of the transactions are still dominated by the US dollar (Shah & Chugan, 2020). The lower acceptance is something that can hinder the seamless adoption of rupee-nization.
- Negative impact on foreign exchange reserves and trade balance- India is a net importer with a trade deficit while having sufficient reserves to safeguard the currency. However, rupee-nization might create a need for greater foreign exchange reserves to manage the trade deficits in an appropriate manner while having an impact on reserves and trade balance.
- Geo-political tensions and uncertainty- There are also uncertainties at the global level related to economic and political factors. The uncertainties around the political and economic crisis would lead to reluctance among nations to trade using the INR.
- Exchange rate volatility- Businesses would be exposed to exchange rate volatility due to the rupee-nization if the value of INR fluctuates significantly because of rupee-nization (Iqbal et al. 2023). This might further make it difficult to predict the earnings while increasing the risks associated with doing a business.
Implications for trade with ASEAN nations with the rupee as a means of payment
Rupee-nization has various implications for trade with various trading blocs in the world and the way in which trade will be done with these trading blocs with the rupee as means of payment. ASEAN is one such trading bloc which is of great significance to the Indian economy and thus the question of the way in which trading will be done with ASEAN countries using rupee arises with de-dollarisation. The value of trade between India and the ASEAN region was more than $110 billion in FY2022 and the largest part of this trade was with Singapore at $30 billion (Minhas, 2023). Among all the ASEAN countries, Malaysia is the first country to agree to make the required trade settlements using the Indian rupee but still has a long way to go to make the final arrangements. With the rupee as the means of payment, there are various things that need to be done while trading with the ASEAN countries. Bilateral agreements between the nations need to be made for the use of domestic currencies for trade settlements and the two nations need to work closely to develop the right framework to reduce the reliance on the US dollar. Further, ASEAN countries would be required to open a Vostro account in India to make settlements of INR trade invoices in an instant manner. Vostro account refers to a bank account that is held by a bank on behalf of another bank in a foreign currency (Ghosh, 2023). Indian importers will be able to make payments in ‘INR’ to the Vostro accounts of the corresponding banks of the ASEAN country while the exporters will be paid from the designated Vostro accounts while the surplus will be used for various investments.
Government policies and efforts to encourage trade with the rupee
Rupee-nization is a daunting task and requires planning at various levels to achieve the set goals and targets that would strengthen the Indian economy. The Indian government has been working towards rupee-nization in a cautious manner keeping all of these things in mind and thus some of the steps taken by the Indian Government towards rupee-nization are-
- Special Rupee Vostro Accounts (SRVAs)- SRVAs enable foreign players to make necessary transactions directly with Indian Banks while engaging with the use of the INR. These accounts have been established by India with 22 countries including the UK, Russia, Sri Lanka and Germany. The RBI has provided permissions to banks from these countries to open these accounts to make the required settlements in rupee and is further in talks with many other countries to make the trade settlements in INR (Economic Times, 2023).
- Bilateral trade agreements- India is engaging with various countries for bilateral currency agreements to encourage trade partners to make the required transactions in INR rather than the US dollars. This will further reduce the reliance of the Indian trade on the US dollar and contribute to the de-dollarisation of the economy. As mentioned earlier, one of the recent agreements signed by India is with the UAE to build a framework that ensures that all the transactions are settled in local currencies.
- Rupee settlement system- RBI has unveiled the rupee settlement system for facilitating international trade and this is nothing but the means of using the INR for making international transactions rather than the use of USD or any other big currencies. The earlier mentioned SRVAs is one such element of the rupee settlement system with various other steps taken by the nations to facilitate transactions using the Indian rupee.
- Promotion of INR at various international stages- India is taking every possible step to promote the use of INR for global transactions. Being a SAARC member, India has been vocal about the use of local currencies for trade within the SAARC countries. At the BRICS summit, India too engaged in the talks of using the Indian rupee for trade settlements with the nations. India has further signed an agreement involving a currency swap of $200 million with Maldives. Similarly, India has been working at various levels to promote the use of INR for global trade while reducing the reliance on the US dollar.
Rupee-nization can be said to be both an alternative as well as de-dollarisation which entails numerous benefits for the Indian economy. However, the entire process of rupee-nization will not be that easy and cannot be rushed into since it would require an extensive level of planning while entailing complex cooperation between the partner countries. There are going to be various challenges and uncertainties involved with the shift towards INR and thus it is recommended to take a gradual and phased approach to the entire process. Efforts need to be made to stabilize the INR value to bolster the confidence of trade partners to settle invoices in INR while making a continuous effort for the promotion of INR in trade. Hence, India needs to be persistent with its efforts to reduce the reliance on the US dollar and nurture the global status of INR for greater economic autonomy.
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" Written By Ms. Ngawang Gamtso Hardy"
Economic Analyst, Deputy Editor-in-Chief
Royal Thai Embassy